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I. INTRODUCTION
1.1. The concept and importance of mathematical economics
Before directly swimming in to the discussion of the theme and role of
mathematical economics, let me cite the speech of Nobel Prize winner economist
Robert Lucas Jr. in some length from his professional memoir.
“Like so many others in my cohort, I internalized its [Samuelson’s Foundations of Economic Analyses] view that if I
couldn’t formulate a problem in economic theory mathematically, I didn’t know what I was doing. I came to the position
that mathematical analysis is not one of many ways of doing economic theory: it is the only way. Economic theory is
mathematical analysis. Everything else is Just pictures and talk…”

As you might have recognized from Lucas’s remark, mathematical economics is

of paramount importance for economic analyses. Indeed, it is essential to know
what mathematical economics is before saying about its role in solving problems
in theoretical and applied economics. Mathematical economics is not a distinct
specialization of economics; rather, it is an approach to economic reasoning.
The ultimate objective of mathematical and literary economics is to come up with
some how valid generalizations about cause effect relationship that prevails
among economic variables. The difference, hence, lies in the ways they
undertake. In mathematical economics, economists make use of mathematical
symbols in the statement of the problem and draw upon known mathematical
theorems to aid in reasoning. In mathematical economics, the assumptions and
conclusions are stated in mathematical symbols than words and in equations
rather than in sentences. Moreover, mathematical economics draws upon
mathematical logics unlike the literary logic, which is drawn by literary
economics. At this juncture, you may ask your self “If the two approaches’ ends
are the same-establish valid hypotheses, then why do economists choose
mathematical approaches with which many literary people are in phobia?”

In fact, it is amazing to see people in horror with mathematics for mathematics is

making things simpler and our life less costly. The choice between literary
approach and mathematics approach to economic reasoning is like the choice
between horse cart and plane for travel from Mekelle to Addis. The time and
cost savings associated with plane or cars has driven out the horse cart from the

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market of travel from Mekelle to Addis. An economist without the tools of

mathematics is like a blind person swimming in the middle of an ocean. Till this
person gives up, he will continue to struggle till he reaches an island; but, his
blindness has left him as incapable to identify whether swimming to the north,
south, east or west is the shortest distance to an island. But an economist
equipped with the tools of mathematics is like a normal person with motorboat
or ship depending upon his personal inclination to each. As a result, most
economic researchers are extensively using the tools of mathematics to
economic reasoning. Specifically mathematical approach has the following
advantages:
a) The language used is more precise and concise;
b) There are wealth of mathematical assumptions that make things simple
and life less costly
c) By forcing us to state explicitly all our assumptions as a prerequisite to the
use of mathematical theorems, it keeps us from the pitfall of an
unintentional adoption of unwanted implicit assumptions
d) It helps us to understand relationships among more than two economic
variables simply and neatly with which the geometric and literary
approaches are at high probability of risk of committing mistakes.
In the following sections, you will briefly refresh your memory about economic
models which are the basic tools in drawing economic policies designed to solve
economic problems of nations.

1.2. Review of Economic Model and Analysis

As you have covered in the course introduction to economics, an economic
theory is necessarily generalization or abstraction from the real world. The
complexity of the real economy does not make it possible for us to understand
all the interrelationships at once; nor, for that matter, are all these
interrelationships of equal importance for the understanding of the particular
economic phenomenon under study. The wise procedure is, hence, to pick out
what appeal to our reason to be the primary factors and relationships relevant to

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our problem and to focus our attention on these alone. Such a deliberately
simplified analytical framework is called an economic model since it is only a
skeletal and rough representation of the actual economy.

If our model is mathematical, it will usually consist of a set of equations designed

to describe the structure of the model. By relating a number of variables to one
another in certain ways, these equations give mathematical form to the set of
analytical assumptions adopted. Then, through the application of relevant
mathematical operations to these equations, we may seek to derive a set of
conclusions which logically follow from these assumptions. Hence, the
ingredients to any mathematical model are variables, constants, parameters,
equations, and identities.

The main aim behind building economic models is to describe how the economy
works and to obtain some how valid predictions about economic variables.
Different models are built for different purposes. Some of the models are
designed to investigate the equilibrium value of the variable as an ultimate end
while some to investigate the movement of a variable (s) over time. Thus, in
economics, we have three types of analyses:
i. Static (equilibrium) analysis
ii. Comparative static analysis
iii. Dynamic analysis
As the name implies, static/equilibrium analysis is the study about equilibrium.
That is, it studies the determination of equilibrium values. Equilibrium is a
constellation of selected interrelated variables so adjusted to one another that no
inherent tendency to change in the model which they constitute. The
mathematics of statics will be handled in linear algebra for economists.

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On the other hand, comparative static studies on the comparison of two or more
equilibrium values. This may involve rate of changes and growth rates. Almost
all of the differential calculus is related with the comparative static.

The third form of economic analyses is dynamic analysis. It involves the time
path of different relevant economic variables. The whole of integral calculus
deals with the mathematics of dynamic analyses.

In this course, you will be introduced with the mathematics of comparative static
and dynamics, and the mathematics for static is left for the next mathematical
economics course.

1.3. The Concept and Type of Functions

For calculus is the study of functions, it is necessary to see what a function is.
Function, as you might remember it, is a unique mathematical rule that relates
one or more variables to determine another variable. It is a special type of
relation in which an independent variable (domain) can never be tied with more
than one dependent variable (range). It is a relationship between numbers in
which to each element in the input (domain), there corresponds exactly one
element in the output (range).
Self test 1: Formulate functions which you see around your area.
There are four methods of representing functions. These are:
i. Vein diagram
ii. Set of order pairs
iii. Equations (commonly used in economic researches)
iv. Graphs(commonly used in economic education)

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Examples
1. Representing functions using vein diagram

A B

D R D R
1 1 1 1
2 2 2 2
3 3 3 3
4 4 4

The column which represents initial points of the rays is the column of domain
and the column to which the rays are directed is the column of range. In this
example, Vein diagram A is a function since we don’t have any two range values
mapped from a single domain. But, B is not a function since the independent
variable [domain] value 2 is tied to output [range] values of 1 and 2
2. Representing functions using set of ordered pairs.
A= { (1,2),(2,3) ,(2,4),(3,6),(4,0)}

B= {(0,1),(1,2) ,(4,8),(7,10),(8,10)}
In this example, A is not a function since domain ‘2’ is mapped to more than
one element in the range but B is a function.
3. Representing functions using equations
A. Y= x + 1 is a function
Domain: X+1 ≥ 0; i.e. = {X: X>-1}
Range: Y ≥ 0
B. Y2 = X + 1 – is not a function since Y can be X + 1 or - X + 1
Domain: X+1 ≥ 0; i.e. = {X: X>-1}
Range: Y εℜ , why not Y ≥ 0?

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4. Representing functions using graphs

Y f(x) = y2=2x
A. It is a Y B. It is not a function
function

X X

Remark: Vertical line test states that if a vertical line crosses the graph of a
function more than once, it is not a function. But, if it crosses only once, it is a
function.

Types of functions
Generally there are two major types of functions; i.e.
i. Algebraic functions
ii. Non algebraic function
⇒ Algebraic functions
Before generalizing what an algebraic function is (are), let’s see each type of
algebraic functions.
a. Polynomial functions: polynomial function of a single variable is given by the
general form
p(x) = Y = aoxo + a1x1 + a2x2 + a3x3 + …… + anxn
a ∈ R
Where  i
n ∈ whole numbers
If n = 0, Y will be a constant function like Y = 3
If n = 1, Y will be a linear function like Y = 2x+3
If n = 2, Y will be a quadratic function like Y = 2 + 4x + x2
b. Rational functions: A rational function is a function which is the ratio of two
polynomial functions. That is,

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P1 ( x)
R( x) =
P2 ( x)

For instance, the famous rectangular hyperbola function is a rational function

with constant numerator and variable denominator. Example of such a function is
600
Y=
X
c. The third type of algebraic function is a function which is the square root of
polynomial function.
NB. An algebraic function is a function which is either polynomial, rational, or
the third type of algebraic function. They can be with one variable or n-
independent variables.

⇒ Non algebraic functions/Transcendental functions

There are four types of non-algebraic functions that are commonly used in
economics; i.e.
i. Exponential function
ii. Logarithmic function
iii. Trigonometric function and
iv. Incommensurable power functions
In this course you will be introduced with the first two non-algebraic functions
and the rest are left for further studies.
1. Exponential functions
An exponential function is a function defined by the form
f ( x) = b n , b > 0 & b ≠1

b=base, x=exponent
The domain of exponential function is the set of real numbers and the range of
the function is that set of positive real numbers.

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Example
x
1
f ( x) = 2 or
x
f ( x) =  
3

Graph of exponential function

Y=bx where
0<b<1 Y=bx where b>1
Y

We use exponential functions for

(0, 1) calculating economic growth.

Note: Every exponential function passes through (0, 1)

Rules of Exponents
For a>0 and b>0, a ≠ 0, and b ≠ 0,
1. a0 =1
2. ax . ay = ax+y
ax
3. y =ax-y
a
4. (ax)y= axy
5. (ab)x=axbx
x
a ax
6.   = x
b b
1
7. a-x= x
a

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2. The Logarithmic Functions

If we start with an exponential functions y=bx and interchanging the two
variables we get an expression given by x=by i.e. log b x = y , b>0,x>0,y ∈ ℜ .

Thus, exponential and logarithmic functions are inverse functions.

The graph of Logarithmic Functions

Y
Y = Log b x Where b>1

(1, 0)
X

Y = Log b x Where 0<b<1

Note: Every logarithmic function passes through (1, 0).

Common and Natural Logarithms
Common logarithms are logarithms whose base is 10. Example of such functions
is Logx = log10 x . On the other hand, natural Logarithms-are logarithms whose

base is e.
ln X = log e x Where e=2.71828183……..

Example
log e 32 ln 32 log e 32 + log e 100 3.4657
Log 16 32 = = = = = 1.25
log e 16 ln 16 log e 16 + log e 100 2.7726

Rules of Natural Logarithms: there are no new rules of natural logarithms. All the
rule of logarithm you learnt in previous classes is also valid for natural
logarithms. That is,

ln(ab) = ln a + ln b

a 
ln  = ln a − ln b  and others stated below
b 
ln a = m ln a
m 


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Rules of Logarithms
For any constants n and c such that n, c>1, then
1. log (cXY ) = log cX + log Yc
X
 
2. log c Y  = log cX − log Yc
n
3. log cX = n log log cX
log nX
4. log =
X
c
log cn
log XX 1
5. log cX = =
log X log CX
c

[ ][ ]
6. log cX x log CX = 1

1.4 Some Economic Functions

Functions, in economics, have diverse and versatile importance. To come up
with neater theoretical results, it is good to model relationships in terms of
mathematical functions. Though functions are used almost in all specializations
of economics extensively, in this course you will be introduced with the most
common microeconomic and macroeconomic functions. Detailed acquaintance
with these functions is left for your “life in economics”.

The most common microeconomic functions are demand functions, supply

functions, production function, cost functions, revenue functions, profit functions,
pollution functions, and other natural resource functions. The most common
macroeconomic functions are consumption, saving, investment, and aggregate
production functions. There are also, a lot of other economic functions, but we
don’t discuss them here due to time limit we have. For the sake of introduction,
let’s take some examples of economic functions.
Examples

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1. The market research department of a company recommended to

management of company ‘x’ that the company manufactures and market a
promising new product. After extensive surveys, the research department
backed up the recommendation with the demand function:
Dx = f(p) = 6000 – 30 Px ……(1)
Where Dx is quantity demanded at price Px during a month. Financial
department has brought the cost function and is given by
C(x) = 72,000 + 60x ……. (2)
Find:
a. Break even prices and outputs
b. Price and output that will maximize profit

Solution
From demand equation we can see that,
x = 6000 – 30Px
30Px = 6000 – x
Px = 200 - 1 X
30

Revenue = PxX = (200 - 1 x) X = − 1 X2 + 200x

30 30
But, Cost = 72,000 + 60x

Therefore profit ( ∏ )= Revenue – Cost

∏ = −1
30
X2 + 200x – (72,000 + 60x)

∏ = − 130 X 2
+ 140x - Profit function

a. To find break even ‘x’ equate ∏ =0

−1 X2 + 140x – 72,000 = 0
30
X2 - 42000x + 2,160,000 = 0 ⇒ Multiplying by -30
2
X - 42000x + 4,410,000 = 4,410,000 - 2,160,000
(X – 2100)2 = 2250,000 ⇒ completing the square
X – 2100 = ± 1,500
X = 2100 ± 1500
X = 3600 or 600 units
Thus, break-even outputs are 600 units and 3600 units

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600 3600
Π (X)
If we find break-even quantities, we can easily get break-even prices by inserting
it in the demand function. That is,
X = 6000 – 30Px
600 = 6000 – 30Px or 3600 = 6000 – 30Px
30Px = 5400 or 30Px = 2400
Px = 180 Px = 80
Break-even prices are 180 or 80; i.e., in a (Q, P) order pair, break even points
are: BE = {(3600, 80), (600, 180)}

b. To find price and output that will maximize profit, let’s remember the behavior
of quadratic functions since Π(x) is aw quadratic function.
Y = ax2 + bx +c

b b2 ab 2
= a (x2 + x+ )+c- Completing square method
a 4a 4a 2
b 2 4ac − b 2
= a (x + ) +
2a 4a
2
 b 
Y will be maximum or minimum depending the value of  X +  since
 2a 

4ac − b 2
is constant, and the sign of a.
4a
−b 4ac − b 2
Vertex at the optimum point will be X = and Y=
a 4a
From this we see that the value of a; i.e., the coefficient of X2 is < 0, and then
the vertex is a maximum point. It is given by

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−b − (140)
X= = = 140 x 15 = 2,100
a  −1
2 
 30 
 −1
(
Π = f (2,100) = 4  − 72,000) − (140)
2
)
 30 
4ac − b 2
Maximum Π =
4a
 −1
4 (− 72,000 ) − (140 )
2

30
Π = f (2,100) =  
 −1
4 
 30 
9600 − 19600
= = -10,000 x − 15
−2 2
15
= 75,000
Price that maximizes profit will be
X = 6000 – 30 Px
2,100 = 6000 – 30 Px
30 Px = 3900
Px =130
Self test 2:
Suppose in the previous example demand function has changed to X = 9000 –
30P and the cost equation to C = 90,000 + 30x
a. Express cost as a function of price
b. Express revenue as a function of price
c. Find beak even prices and outputs
d. Find the price that will maximize profit

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II. AN INTRODUCTION TO CALCULUS

2.1. Limits and continuity
Limits
x2 − x − 6
The function f(x) = is undefined at x = -2. But to what value f(x) gets
x+2
closer when x is close but not equal to –2? Here we are introducing the concept
of limit. By evaluating the function at values of x at both side of and close to
X=–2 but not at –2, we can see to what value the function approaches. Let’s
now inspect the function to the left and the right of X=-2.

X -4 -3 -2.5 -2.1 -2.0001 From above

F(x) -7 -6 -5.5 -5.1 -5.0001

X 4 2 0 -1 -1.5 -1.999 From below

F(x) 1 -1 -3 -4 -4.5 -4.999

It is apparent that as the value of x approaches –2 from both sides, the value of
the function approaches –5. In general, if f(x) approaches some finite number as
x approaches a, then we can say that:
Limf ( x) = L
x→a

Where: L is finite number

Lim - is limit of
x→ x is closer and closer but not equal to a
N.B: Two basic facts regarding limits must be kept in mind.
i. The limit of a function as x approaches a- is independent of the value
of the function at a. Even though Limf ( x) = L exists the value of the
x→a

function
a. May be undefined

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b. May be defined and different from the limit

ii. The limit is said to exist only if the following conditions are satisfied:
a. The limit L must be a finite number
b. The limit as x approaches a from the left written as
Limf ( x) = L
must equal to the limit as x approaches a from the
x→a−
Limf ( x) = L
right written as .
x → a+

Limf ( x) = L Limf ( x) = L
That is we must have =
x→a− x → a+
Examples
1
1. Let Y = , x ≠ 0 find the LimY
x X →0

Solution
1
Lim = − ∞ =L1 (LHL-Left hand side limit)
x
x →0 −

1
Lim = + ∞ =L2 (RHL-Right hand side limit)
x
x →0 +

1
∴ L1 ≠ L2, Lim does not exist (DNE)
x
X →0

2. Lim( x + 2) = 2+2=4
X →2

Lim( x + 2) =4, Lim( x + 2) = 4 ∴ Lim( x + 2) = 4

X →2− x→2+ x→2

x −1 0
3. Lim = =0
2x − 3 − 1
x →1

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Self test 3:
Try the following problems
1. Lim x
x →0

2. Lim x + 4
x → −4

x
3. Lim , try also as x → 0
x
x→2

x −1
4. Lim
x →1 x + x−2
2

x 2 − 3x
5. Lim
x →0 x
1− x
6. Lim
x →1 1− x
Summary:
In evaluating limit of a function, we come up with one of the four different
results that we summarize them below. Assume that L represents some non-
zero real number when L appears in the denominator.

Limit of a function Conclusion

L Limit is L
0 Limit is zero
L
L Limit DNE
0
0 Limit is indeterminate. To come up with determinate
0 limit, transform the function to produce one of the
form above / use L-H ô pital’s rule♥

f ( x) f ' ( x)
♥
L-H ô pital’s rule states that lim x →a is equivalent to lim x →a . To see how to find out f’(x) and
g ( x) g ' ( x)
g’(x), you have to wait for the discussion on differential calculus which is the concern of the second module.

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Properties of limits/the limit theorems

We now state and illustrate limit theorems we shall refer to from time to time
while we make use of limits in our analyses. The theorems are institutively
reasonable; their proof requires advanced analyses, which lie out of the scope of
this course.
If K and C are constants, n is a positive integer, Limf (x ) = A and Lim g ( x ) = B,
x →c x →c

then:
1. Limk = k
x →c

2. Lim k f ( x ) = k Limf ( x ) = kA
x →c x →c

3. Limx n = C n
x →c

4. Lim[ f (x ) ± g ( x )] = Lim f ( x) ± Lim g ( x ) = A ± B

x→c x →c x →c

5. It is an extension of “3”. If P is a polynomial function, then Lim P ( x) = p(c ).

x →c

6. Lim[ f ( x ).g (x )] = Limf ( x ). Limg ( x ) = A.B,

x →c x →c x →c

Lim f ( x)
 f ( x)  A
7. Lim  =
x →c
= ,B ≠ 0
x→c g ( x) Lim g ( x) B
 
x →c

8. Lim n f ( x) = n Lim f ( x) = n A (When n is odd number. But if n is even, take a

x→c
x →c

special care!)
n
Lim[ f ( x)] =  Lim f ( x)
n
9.
x →c  x →c 

Examples
Find the limits of the following functions

3x 2 + 2 Lim 3x 2 + 2 14
1. Lim 2 = x →2
= = 14
x −3 Limx 2 − 3 1
x →2 x→2

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2. Lim 3 x 5 − 2 x 2 + 3 x − 1 = 3(2) 5 − 2(2) 5 + 3(2) − 1 = 93

x→2

3. Lim x 2 − 4 = Lim( x 2 − 4) = 12 = 4 3 = 2 3
x→4 x→4

x −3 x −3 x +3 x−9 1 1
4. Lim = Lim . = Lim . =
x →9 x−9 x →9 x − 9 x + 3 x →9 x − 9 x + 3 6
Now , try to check your self using the problem below
 x 2 + 1, x < 0
5. Given g(x)= 
 x, x ≥ 0
Find
A. Limg ( x)
x→2

B. Limg ( x)
x→0

The answers are 2 and DNE for a and b respectively.

More on Indeterminate Limits

The best method to deal with indeterminate limits is the L-H oˆ pital’s rule.
However, till you are formally introduced with the concept in the coming module,
you can use some of the following methods [Expansion Method and h-method of
evaluating limits] as additional toolkits.

h-method
We put a+h in place of x and simplify such that h gets cancelled from
denominator and numerator. Putting h=0, we get the limit of f(x) as x → a.

Example
x3 −1
1. Evaluate Lim
x →1 x2 −1

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(1 + h) 3 − 1
= Lim
h →0 (1 + h) 2 − 1

(h 3 + 3h 2 + 3h + 1) − 1
= Lim
h →0 (h 2 + 2h + 1) − 1

h 3 + 3h 2 + 3h
= Lim
h →0 h 2 + 2h
3 + 3h + h 2
= Lim
h →0 h+2

=3
2
Expansion method
This method is applicable to functions which can be expanded in series. The
following expansions are often used in economics.
n(n − 1) x 2 n(n − 1)(n − 2) x 3
a. ( x + 1) n = 1 + nx + + + .......
2! 3!
Provided that n ∈ R and x < 1 for convergence of limits

m
 1
e = Lim1 +  or
 m
m →∞

e = Lim(1 + x) x
x →0

= 2.71828.....

x2 x3
b. e x = 1 + x + + + ... + ∞
2! 3!

x3 x5 x7 x9
c. sin x = x − + − + ........
3! 5! 7! 9!

−x x2 x3
d. e = 1− x + − ....∞
2! 3!

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x2 x3 x4
e. log(1 + x) = x − 1 − + − + .........∞ = ln(1 + x)
2 3 4

x 2 x 4 x6 x8
f. cos x = 1 − + − +
2! 4! 6! 8!

Example
Find the limits of the following functions

x2 x3 x2 x3
(1 + x + + + .......∞) − (1 − x + − − .......∞
e x − e −x 2! 3! 2! 3!
1. Lim = Lim
x→0 x x →0 x

 x3 x5 
2 x + + + .......∞ 
3! 5!  = 2(1) = 2
= Lim 
x →0 x

x
 3 1 3
2. Lim1 +  let = ⇔ x = 3 y
x →∞
 x y x
3
3  y
 1
3y
 1  y    1 
= Lim1 +  = Lim 1 +   =  Lim1 +   = e 3
Y →∞
 y y →∞
 y   y
  y →∞ 

 Log (1 + x) 
3. Find Lim  
x →0
 x 
 x2 x3 x4 
 x − + − + ..... 
⇔ Lim  2 3 4 
x →0
 x 
 

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 x x2 x3 
1 − + − + ..... 
⇔ Lim  2 3 4  =1
x →0
 x 
 

Limits at infinity
It is also of interest to determine what happens to the functional values f(x) as x
assumes large positive values and large negative values. We begin by
considering an example.
2x 2
Example: Consider the function f ( x) = , which is defined for all real
(1 + x 2 )

numbers. What happens to the functional values f(x) as x assumes larger and
larger positive values?

Solution: Let’s investigate this question using calculator. The table below shows
the values of f(x) for increasingly large values of x.

X 0 5 10 50 100 500 1000

F(x) 0 1.92 1.98 1.9992 1.9998 1.999992 1.999998

The results portray as x + → ∞, f ( x) → 2. Check x → ∞ ⇔ f ( x) → 2.

Lim f ( x) = 2
x →∞

How can one evaluate limits of the form Lim f ( x) and Lim− f ( x) without calculator
x →∞ x →∞

and graph experiments? Except for property “5”, all the properties of limit
described earlier are valid if we replace the statement x → c with the
statement x → ∞ or x → ∞ − . Thus,

2x 2 2
Lim = Lim =2
x →∞ + 1 + x 2 x →∞ + 1
+1
x2

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To deal with the problem of limit at infinity, divide both the numerator and
denominator with the highest powered variable (in this case X2) and take the
usual procedure.
2x 2 2x 2
Lim− =2 ⇔ Thus, Lim =2
x →∞ x2 +1 x →∞ x2 +1

2x + 3
2. Find Lim
x →∞ x−4

As x → ∞ + both the numerator and denominator increases without bound,

∞+
resulting in the indeterminate form + . We can transform this function using
∞
elementary algebra to determine a form, which can be used to find determinate
1
limit. That is, we have to change it into the form .
xn

3
2+
2x + 3 x =2
Lim = Lim
x →∞ x − 4 x →∞ 4
1+
x
N.B: When the degree of N(x) = D(x), x → ∞ limit is the ratio of leading
coefficients respectively♥.
L.C.N ( X )
i.e. Limit = Where L.C. refers to the leading coefficient ( that is
L.C.D( X )
the coefficient of the highest powered variable).
4 x 2 + 3x + 2
3. Find Lim−
x →∞ 2x3 + 5

Solution
Divide both N(x) and D(x) by the term of the largest degree (X3).

♥
N(x) and D(x) in this case of limit at infinity refer to numerator and denominator respectively.

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Lim−
[4 x + 3x + 2] ÷ ( x )
2 3

x →∞ [2 x + 5] ÷ ( x )
3 3

4 3 2
+ 2 + 3
Lim x x x =0
x →∞ − 5
2+ 3
x
3x 4 + 9
4. Find Lim
x →∞ 8x 6 + 5
3 9
+ 6
= Lim x
2
x = 0 =0
x →∞ 5 8
8+ 6
x
N.B: For rational functions, limit at infinity, when Deg N(x) < Deg D(x), limit is
zero.

2x5 + 7
5. Find Lim
x →∞ 6x3 + 4

7
2+
= Lim x 5 = 2 = DNE
x →∞ 6 4 0
2
+ 5
x x

3x 4 + 6 x
6. Find Lim
x →∞ x2 + 4

6
3+
= Lim x 3 = 3 = DNE
x →∞ 1 4 0
2
+ 4
x x
N.B: For rational functions, limit at infinity, when the Deg N(x) > Deg D(x), limit
does not exist.

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Applications
1. The ECC is embarking on an extensive advertising campaign to market its
new detergent. In the past, advertising has been very successful in increasing
public awareness and sales of ECC’s products. A senior advertising executive has
estimated that, for the new product, profit (Π) is related to advertising
expenditure (x) according to the formula:
16 x + 10
∏( x) =
x+3
Where x and Π are measured in units of $100,000. Find the maximum profit
that the firm can obtain using advertising.
Solution
10
16 +
Lim ∏( x) = Lim x = 16
x →∞ x → ∞ 3
1+
x
Thus, the maximum level of profit is: Π=$1,600,000

2. Suppose that for a certain corporation the monthly profit (in thousands of
2t − 4
dollars) at time t (in months) is estimated by: ∏(t ) =
t +1
Predict the long-range profit as t → ∞
Solution
4
2−
Lim ∏(t ) = Lim t = $2000
t →∞ t →∞ 1
1+
t
3. XYZ company is spending Birr “y” (in millions, and yielding sales of Br. S(x) (in
millions) represented by the function:
5 x 2 − 10 x + 5
S ( x) = , x ≥ 1 , determine the absolute ceiling for their sales
x 2 − 2x + 2
Solution

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Lim s( x) = Br.5 million

x →∞

4. ABC company manufactures tractor bodies and spending Br. X (in thousands)
on advertising the income from sales S(x), measured in thousands is given by:
120 x 3 − 600 x + 3
S ( x) = , x ≥ 5 , determine the absolute ceiling for sales.
2 x 2 − 10 x + 1
Solution
600 3
120 − + 3
Lim s ( x) = Lim x 2
x = 120 = DNE
x →∞ x → ∞ 2 10 1 0
− 2 + 3
x x x
Thus, there is no absolute ceiling for their sales!
Continuity
A given function is said to be continuous over a given rage [at a point] if it is
defined for all real numbers within that range [at that point]. Graphically
speaking, continuity occurs if we can’t draw graph of a function with out lifting
our pen/pencil. Any function is said to be continuous at a point such as X=C if
the following conditions are satisfied. That is
a. F(x) is defined at x=c i.e. f(c)exists
b. Lim exists
x→c

c. Lim = f(c)
x →c

Examples
1. Is the function f ( x ) = 2 x + 4 continuous at x=2?

0 if x < 0
2. Is the function f ( x) =  continuous?
 x if x ≥ 0

Solution
1. f(2) = 8
Lim = 8
x→2

Therefore, Lim = f ( 2) = 8
x→2

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Thus, f(x) is continuous at x=2.

2. In identifying the continuity of stepwise functions, it is good to check at
trouble spots. Trouble spots are found at transitions.
Trouble spot is at x=0, since the function is defined differently for x < 0 and
x ≥ 0.
a. f (0) = 0 c. Lim f ( x ) = f (0) = 0
x→0

b. Lim f ( x ) = 0
x→0

Thus, f(x) is continuous.

x if x ≤ 0
 2
3. Is f ( x) =  x if 0 < x ≤ 4 continuous?
2 x + 4 if x > 4

Solution
The trouble spots are at x=0 and at x=4. Checking at each point, we will have

For x=0 For x=4

F(0) = 0 F(4) = 16
Lim f ( x ) = 0 Lim− f ( x ) = 16
x→0 x→4

Therefore, f(x) is continuous at x=0 Lim f ( x) = DNE

x→4

Therefore, f(x) is discontinuous at x=4

Thus, f(x) is discontinuous at x=4 though it is continuous at x=0.
Applications
1. The weekly cost c (m) of renting a car from an Auto Rent company
depends on the number of miles driven. The cost function is given by

100 if 0 < m ≤ 200


c(m) = 100 + 0.2m if 200 < m ≤ 500
150 + 0.1m if m > 500

Is c(m) continuous for m>0?

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2. Determine the constant λ so that the following function is continuous

 X 3 ..... X ≤ 2
f ( x) =  2
λX .... X > 2

3. Determine the constants λ & K so that the following function is

continuous.
2....... X ≤ −1

f ( x) = λX + κ .... − 1 < X < 3
− 2.... X ≥ 3


4. Determine the values of λ & θ so that the following function is continuous

x + 1 1 < x < 3
f (x ) =  2
 x + λx + θ x − 2 ≥1

5. Determine the value of κ so that the following function is continuous

x + 3 x≤2
f (x ) = 
κx + 6 x>2

6. Find Lim − x 2 + 4 < f ( x ) < x 2 + 4

x →0

Properties of continuities
Functions have continuity property similar to limit properties. For example, the
sum, difference, product, and quotient of two continuous functions are
continuous, except for values along others listed below will enable us to move
from continuity at point to continuity over an interval. Let’s see the properties of
continuity.
1. If f ( x ) = κ , constant function, it is continuous always

E.g. Y=2 is continuous for all values of x

2. If p(x ) is a polynomial function, it is continuous for all values of X.

E.g. f ( x) = x 2 − 2 x + 1

3. Rational functions are continuous for all values of X except those that make
the denominator 0.

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x
E.g. f ( x) = is discontinuous at x=-2 & x=3
( x + 2)( x − 3)

4. If n is an odd integer greater than 1, then n f ( x) is continuous wherever f(x)

is continuous.

E.g. f ( x) = 3 x 2 − 4

5. If n is an even positive integer, then n f ( x) is continuous wherever f(x)

wherever f(x) is continuous and positive.

E.g. f ( x ) = x − 2 continuous for x > 2 and discontinuous for x ≤ 2 .

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2.2. Increments, tangent lines and rates of change

We will now use the concept of limit to solve some of the problems of calculus.
Before pursuing with these problems, we digress for a moment to introduce the
concept of increments. Let f(x) =y

If x changes from X1 to X2, then y changes from f(X1) to f(X2). Mathematically,

the change in x and the corresponding change in y, called increments in x and y,
respectively, are denoted by δx or ∆x, and δy or∆y.
That is,
X2- X1=∆x
X2=∆x+ X1
F(X2)-f (X1) = ∆Y
F(∆X+X1) - f (X1) =∆Y
F(∆X+X1) = f (X1)+ ∆Y

Slope and tangent lines

The concept of coordinate geometry tells us that a tangent to a circle is a line
that passes through one and only one point on the circle. But, how do we define
and find a tangent line to graph of a function at a point?

Tangent line
a ⇒ ( x1 , y1 )
Secant line
b ⇒ ( x2 , y 2 )
b F(x)

a
∆y x 2 = ∆x + x1
∆x y 2 = ∆y + y1

x1 x2= x+∆x

Rise f ( x 2 ) − f ( x1 ) f ( x1 + ∆x ) − f ( x1 ) ∆y
Slope of the sec ant line = = = =
Run x 2 − x1 ∆x ∆x

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As we let δx tend to 0, the secant line approaches the tangent line. Thus, the
slope of the tangent line becomes.

f ( x1 + ∆x) − f ( x1 )
m = Lim
∆x →0 ∆x

Example

1. Given f ( x) = x 2 , find the slope and equation of the tangent line to f(x) at

x=1.
Solution
f ( x) = x 2
f (1) = 1
f (1 + ∆x) = (∆x + 1) 2 = ∆x 2 + 2∆x + 1

f ( x + ∆x ) − f ( x )
Slope of the tangent line = Lim
∆x →0 ∆x
( ∆x) + 2(∆x) + 1 − 1
2
= Lim
∆x →0 ∆x
= Lim ∆x + 2 = 2
∆x →0

To find equation of the tangent line use

y = mx + b
y = 2x + b
1= 2+b
b = −1
Thus, the equation of the tangent line is
y = 2 x + −1

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Average and Instantaneous rates of change

The slope of the tangent line is also called the instantaneous rate of change and
the slope of a secant line is known as the average rate of change.
f ( x + ∆x ) − f ( x )
Instantaneous rate of Change = Lim ∆x→0 { }
∆x

f ( x + ∆x ) − f ( x )
Average rate of change =
∆x
The value of the average rate of change is also known as the difference quotient.
Examples
1. Given f ( x) = 1000 − 2 x 2 , find

a. The average rate of f(x) when x increases from 40 to 50.

b. Find the rate of change of f(x) at x=50
Solution
a.
f (40) = 1000 − 2(40 × 40) = −2,200
f (50) = 1000 − 2(50 × 50) = −4,000
∆y f (50) − f (40) − 4000 − (−2,200)
= = = − 180
∆x 50 − 40 10
Interpretation: For x between 40 and 50, for a unit increase in x, on average,
brings a decrease of y by 180.
b. The given value of x=50.

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f ( x + ∆x) − f ( x)
Instantaneous rate of change = Lim
∆x →0 ∆x
f ( x) − f (50)
= Lim
x →50 x − 50
(1000 − 2 x 2 − (−4000)
= Lim
x →50 x − 50
5000 − 2 x 2
= Lim
x →50 x − 50
2500 − x 2
= 2 Lim
x →50 x − 50
= 2 Lim(50 + x) = − 200
x →50

f ( x) = 1000 − 2 x 2 f ( x + ∆x) = 1000 − 2( x + ∆x) 2 = 1000 − 2 x 2 − 4 x∆x − 2(∆x) 2

f ( x + ∆x) − f ( x) = 1000 − 2 x 2 − 4 xσx − 2(∆x) 2 − 1000 + 2 x 2
f ( x + ∆x) − f ( x)
= −4 x − 2∆x
∆x
f ( x + ∆x) − f ( x)
Lim = −4 x
∆x →0 ∆x
So at x=50, the instantaneous rate of change becomes –4x=-200.
Interpretation: when x changes by a number closer to zero from 50, y decreases
at a rate 200 for unit x. For e.g. if ∆x=2%,∆y=[2%]x[-200]=-4.

N.B, The rate of change between two points is average rate of change and at a
point is instantaneous rate of change.

2. Given revenue of x-company R ( x) = 30 x + 0.1x 2 , find

a. Average rate of change in revenue when x increases from 10 to 20

units
b. Marginal revenue at x=20
Solution
f (20) − f (10) 640 − 310
a. Average rate of change = = = 33
20 − 10 10

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R( x + ∆x) − R( x)
b. MR(x)= lim ∆X →0 [ ] = by taking R(x)=f(x), we can
∆x
have
1 1 1 1
30 x + 30∆x + x 2 + x∆x + ∆x 2 − 30 x − ∆x 2
f ( x + ∆x) − f ( x) 10 5 10 10
Lim =
∆x → 0 ∆x ∆x
1 1
30∆x + x∆x + ∆x 2
5 10 1 1
= Lim = Lim 30 + x + ∆x
∆x →0 ∆x ∆x → 0 5 10
1
= 30 + x
5
1
MRx = 20 − 30 + × 20 = 34
5

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III Differential Calculus: Fundamental Techniques

3.1. Introduction
This module deals with the techniques and applications of differential
calculus. It deals with concepts and techniques of mathematical
economics, which is commonly used in comparative statics analyses of
economic variables. It mainly deals with the concept of instantaneous
rate of change-namely the derivative. In economics, we are interested
in instantaneous rates of changes of various economic variables. For
instance, we deal with marginal utility, marginal product, marginal
revenue, value of marginal product, and other marginal values, which
are the instantaneous rate of change of their respective total
functions.

This module is divided in to two main parts where the first part deals
with the basic techniques of differential calculus; the second part deals
with the applications of differential calculus. The first part specifically
deals with concepts such as the derivative, rules/theorems of
derivative, differentials and higher order derivative, total and partial
derivatives, and finally about some applications of differential calculus
such as L Hôpital’s rule, which is used to deal with indeterminate
limits, homogeneous functions and Euler’s theorem. On the other
hand, the second theorem discusses about application concepts such
as increasing, decreasing, concave up, concave down, and
optimizations.

Let’s begin with the basic techniques and finally we will see its
applications in the area of economic reasoning. The concepts are
simple and valuable toolkits for an enterprising economist and all it
needs is curiosity, closeness and above all hard work. Enjoy, your
reading!

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3.2. The Concept of the Derivative

If f is a function defined by y=f (x), then the derivative of f (x) for any
dy
value of x, is denoted by , y’ or f ’(x) is the instantaneous rate of
dx
change of f (X) which is given by:

dy f ( x + σx) − f ( x)
= Lim
dx σx →0 σx
As you might remember from the previous discussion, the derivative is
also the slope of the tangent line to f (x) at a point. Before we directly
go to the discussion of the rules of derivatives, let’s see some
examples.

Examples:
dy
1. Given f (x)=3x+7, find
dx
dy
2. Given f (x)=x2, find
dx
dy
3. Given f (x)=Xn , find
dx

Solutions:

1. For f (x)=3X+7,
dy f ( x + σx) − f ( x)
= Lim
dx σx →0 σx
[[3( x + σx) + 7] − (3 x + 7)]
= Lim
σx → 0 σx
3x + 3σx + 7 − 3 x − 7
= Lim
σx → 0 σx
3σx
= Lim
σx → 0 σx

= Lim 3
σx → 0

=3

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2. For f (x)=X2
dy f ( x + σx) − f ( x)
= Lim
dx σx →0 σx
( x + σx) 2 − x 2
= Lim
σx → 0 σx
( x 2 + 2σx.x + σx 2 − x 2 )
= Lim
σx → 0 σx
= Lim(2 x + σx)
σx → 0

= 2x

3. f ( x) = x n
dy f ( x + σx) − f ( x)
= Lim
dx σx →0 σx
( x + σx) − x n
n
= Lim
σx → 0 σx
n(n − 1) n − 2 2
[ x n + nx n −1σx + x σx + ...... + σx n ] − [ x n ]
= Lim 2
σx → 0 σx

n ( n − 2) n − 2
= Lim{nx n −1 + x σx + ...... + σx n −1}
σx → 0 2

= nx n −1

d n n −1
Thus, { X } = n X
dx

Directly evaluating f (x) and f (x+σx) to come up with the derivative is

some how tiresome if not difficult. However, using the result of
example-3 above along with other rules will simplify our calculations.

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Note that,
i. The derivative, which is one of the most fundamental concepts in
calculus, is the same as the following two concepts.
a. Slope of a line tangent to a curve at x
b. Instantaneous rate of change of f(x) at x
ii. The process of obtaining f’ (x) from f (x) is known as
differentiation and if the derivative exists, then the function is
differentiable at a point or over an interval. In the following
section, we will present the rules of derivatives, which will
largely simplify our calculation of the derivative.

3.3 The Rules or Theorems of Derivates

In this section, we formally state the different rules of derivatives that
are important in several problems of getting the derivative. These are
the constant rule, the simple power rule, the coefficient rule,
sum/difference rule, product rule, quotient rule, chain rule, and others.

3.3.1 The constant rule

If c is constant and if f(x)=c, then f’(x)=0

Examples
a. If f (x)=2, then f ‘(x)=0
b. If f (x)=-12, then f ‘(x)=0

3.3.2 The Simple Power rule

If f ( x) = x n , where n ∈ ℜ, the f ' ( x) =nxn-1

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Examples

Find f ' ( x) of functions of

i. ⇒ Y = 2 x 5 ,
ii. ⇒ Y = x ,
iii. ⇒ Y = x 2 x

Solution
i. Y = 2x 5 1 1
ii. Y = x = x 2
iii. Y = x 2
x=x x 2 2
dy
= 2.5 x 5−1 dy 1 2 −1
1 5
dx = x Y=X 2

= 10 x 4 dx 2 5
dy 5 2 −1
1 −2
1
= x
= x dx 2
2 3
dy 1 dy 5 2
= = x
dx 2 x dx 2

3.3.3 The coefficient rule

For any constant C and function m(x),
If f ( x) = C m( x), then f ' ( x) = C m' ( x)

Example

Y = 3x 2
dy dx 2
=3
dx dx
= 3[2 x ]
= 6x
3.3.4 The sum or difference rule

If f ( x) = u ( x) ± v( x), ~ thenf ' ( x) = u ' ( x) ± v' ( x)

Example

1. If y = x − 3x + 10 , then the derivative

3 2

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dy 3
( x − 3x 2 + 10)
dx
d 3 d d
= x − 3 x 2 + 10
dx dx dx
= 3x − 6 x
2

2. y = x 4 − 2 x 2 + 1
dy 4
( x − 2 x 2 + 1)
dx
dy 4 dy dy
= x − 2 x2 + 1
dx dx dx
= 4X − 4X
3

Exercise
1. The total revenue for a commodity is described by
R( x) = 300 x − 0.02 x 2 . What is the marginal revenue when 50 units
are sold and interpret your result?

2. Suppose the total cost function for the production of x units of a

product is given by: Tc=2X+120
a. Find the instantaneous rate of change of average cost with
respect to the number of units produced.
b. Find the level of production at which this rate of change equals
zero.

3. The profit from the sale of x stereos per month for a certain co. is
given by:
π ( x) = 800 − x 2 + 0.2 x 2
Find the rate of change in the monthly profit for 100 stereos.

3.3.5 The product rule

Although most of the time a function is given as a sum or difference of
terms, there are times when functions are presented in products.
If f ( x) = u ( x).v( x), then f ' ( x) = u ' ( x).v( x) + v' ( x).u ( x)
Example
1. Y = (3x − 2 x 2 )(5 + 4 x)
dy
= (5 + 4 x)(3 − 4 x) + (3 x − 2 x 2 )(4)
dx
= 15 − 20 x + 12 x − 16 x 2 + 12 x − 8 x 2
= − 24 x 2 + 4 x + 15

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1  dy x2 +1
2. If Y = ( x − 1) + 1 , find . The answer is
x  dx x2

3.3.6 The quotient rule

If u (x) and V (x) are two functions and if f(x) is the quotient,
u ( x) v( x)u ' ( x) − u ( x)v' ( x)
If f ( x) = , then f ' ( x) =
v( x) [v( x)] 2

Example
(1 − 2 x)(3 x + 2) dy
1. Y = find ,
5x − 4 dx
Solution

 d (1 − 2 x)(3 X + 2) d (5 x − 4) 
 ((5 x − 4 ) ) − ((1 − 2 x)(3 x + 2) 
dY  dx dx 
=
dx (5 x − 4) 2
(5 x − 4)[(1 − 2 x)(3) + (3 x + 2)(−2)] − [5(1 − 2 x)(3x + 2)]
=
(5 x − 4) 2
(5 x − 4)(−1 − 12 x) − [(5 − 10 x)(3x + 2)]
=
(5 x − 4) 2
− 30 X 2 + 48 X − 6
=
(5 X − 4) 2

x −1 dy
2. Y = , find ,
x +1 dx
Solution
d ( x − 1) d ( x + 1)
( x + 1) − ( x − 1)
dx dx
( x + 1) 2
( x + 1)(1) − ( x − 1)(1)
=
( x + 1) 2
x +1− x +1
=
( x + 1) 2
2
=
( x + 1) 2

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3.3.7 Differentiation of a composite function

df
If the function f is a function of g and g is a function of (x), then is:
dx

df df dg
= . Y = f ( g ), Z = g ( x)
dx dg dx

Example
dy
1. Y = I 4 + 3I 3 and I = x 2 , find
dx
Solution
dy dy dI
= . = [4 I 3 + 9 I 2 ][2 x]
dx dI dx
= 8 xI 3 + 18 xI 2
= 8 x( x 2 ) 3 + 18 x( x 2 ) 2
= 8 x 7 + 18 x 5

dy
2. Y = x 2 − 1 find
dx
Solution

Let x 2 − 1 = u
1
Y =u 2
dy dy du 1 x x
= . = .2 x = =
dx du dx 2 u u x2 −1

dy
3. Y = ( x 2 − 4 x) 6 , find
dx
Solution
Let x2 –4X =U,
So that Y= U6
dy dy du
= * = 6u 5 (2 x − 4)
dx du dx
dy
= 6( x 2 − 4 x) 5 .(2 x − 4)
dx
= (12 x − 24)( x 2 − 4 x) 5

4. The total physical output P of workers is a function of the number of

workers “x”. The function f(x)=p is called physical productivity

45
 42

function and is given by P = 10(3 x + 1) 3 − 10, find the marginal physical

productivity.

5. Suppose the revenue function for a certain product is given by

R( x) = 15(2 x + 1) −1 + 30 x − 5, where x is in thousands units and R is in
thousands.
a. Find the MR when 200 units are sold
b. How is revenue changing when 2000 units are sold

3.3.8 Derivatives of implicit functions

Implicit functions are those functions whose dependent and
independent variables are not explicitly stated. That is, we don’t know
whether a given variable is a cause or an effect variable without any a
priori information when we encounter implicit functions. When the
dependent and independent variables are not explicitly stated, one
dy
may not easily come up with . But using implicit differentiation one
dx
dy
can calculate .
dx

Example

1. 3xy − y = 2
d d (2)
[(3 xy − y )] = ...differentiating ~ both ~ sides ~ w.r.t. X
dx dx
d 3 xy dy
= − =0
dx dx
dy dxy
=3
dx dx
dy dx
= 3.x + y … Applying the product rule to (xy)
dx dx
dx dy
= 3x +y
dy dx
dy dy
− 3x =y
dx dx

46
 43

y
[ ]
dy Y 1
= =
dx 1 − 3 x 1 − 3 x
[ ]
1
2 −1 2
=[ ][ ]... sin ce ~ 3 xy − y = 2, y (3 x − 1) = 2, and ~ y =
3x − 1 1 − 3x 3x − 1
−2
=
(3 x − 1) 2

2. 3xy − x = 2
3 xy = x + 2
d (3xy ) d ( x + 2)
=
dx dx
 dy dx 
3 x + y  =1
 dx dx 
dy 1
x + y=
dx 3
dy 1
x = −Y
dx 3
dy 1 y
= −
dx 3 x x
1 − 3y
=
3x
 + 2
x
1 − 3 
 3x  Since Y = x + 2
=
3x 3x
x+2
1−
= x
3x
1
x−x−2 1
= .
x 3x
−2
= 2
3x
dy
3. Find of x 2 + y 3 = 2xy 2
dx
d ( x 2 + y 2 ) d 2 xy 2
= … Differentiating both sides w.r.t X
dx dx

47
 44

dy 2  dx dy 2  2
2x + = 2 y 2 +x  … Applying he product rule to xy
dx  dx dx 
2
dy dy  2  dy 2 dy   dy 2
2x + . = 2 y + x  .   … Applying the chain rule to
dy dx   dy dx   dx
dy  dy 
2 x + 2 y. = 2 y 2 + x 2 y 
dx  dx 
dy dy
2x + 2 y = 2 y 2 + 4 xy
dx dx
dy dy
2y − 4 xy = 2 y 2 − 2x
dx dx
dy 2 y 2 − 2 x
=
dx 2 y − 4 xy

Note:
You can use the following generalized steps
1. Treat y as a function of x and differentiate each term of the
equation with respect to x.
dy
2. Put all terms containing the factor on one side of the
dx
equation and the rest of the terms on the other side.
dy
3. Factor out from all terms that contain it
dx
dy
4. Solve the equation for
dx
3.3.9 Derivatives of logarithmic and exponential functions
The concept and rules governing logarithmic and exponential functions
were described previously in the first chapter. In this section, we will
review point out how to find the derivatives of logarithmic and
exponential functions.

3.3.9.1 Derivatives of logarithmic functions

dy
If Y = log ex = ln x, find
dx
y + σy = ln( x + σx)

48
 45

σy = ln(x +σx) − y
= ln(x +σx) − ln x
 σx 
= ln1+ 
 x
2 3 4
 σx   σx   σx 
     
σx  x   x   x 
σy = − + − + ......See expansion from the previous discussion
x 2 3 4
σy 1 σx σx (σx)
2 3
= − + − + .......
σx x 2x 3x3 4x 4
σy 1
Lim =
σx→0 σx x
d 1
Thus, ln x =
dx x
If the function is stated to any base than e, it is possible to transform
it to the natural logarithm form and apply the above formula.
For example, if you are given:
y = log ax
ln x
=
ln a
 ln x 
d 
dy  ln a 
= 1
dx dx … Since ln a and are constants.
ln a
1 d ln x
=( )( )
ln a dx
1 1
= .
x ln a
1
= log ea
x

d log ax 1
∴ =
dx x ln a

If U=f (x), using the chain rule,

d log ua 1
= .u ' ( x)
dx u ln a

49
 46

Examples:
du
Find for each of the functions below
dx

1. y = x 3 + 3 ln x
2. y = log 4 ( x 3 + 1)
3. y = ln x 4
4. y = ln 3 x
5. x ln y = 4

Solution
dy d ln x 3
1. = 3x 2 + 3 = 3x 2 +
dx dx x

2. Let x 3 + 1 = u
ln u
So y = log u4 =
ln 4
dy dy du 1  d ln u du 
= . = . . 
dx du dx ln 4  du dx 
1 1
= . .3x 2
ln 4 u
3x 2 log e 4
=
x3 + 1

3. y = ln x 4 let u = x 4
dy dy du
= .
dx du dx
d ln u du
= .
du dx
1
= .4 x 3
u
4x 3
= 4
x
4
=
x

50
 47

4. Let 3 x = u
y = ln u
dy dy du 1 1
= . = . 3
dx du dx u 2 x
1 3
= .
3. x 2 x
1
=
2x
4
5. ln y =
x
d ln y dy − 4
. = Differentiating both sides w.r.t. X and applying the chain rule.
dy dx x 2
1 dy − 4
= =
y dx x 2
dy − 4 y
= = 2
dx x
4
− 4e x
= 2
... sin ce ~ y = e 4 / x
x

3.3.9.2 Derivatives of exponential functions

dy
If y = a x , a > 0& ≠ 1, then can easily be found by changing it to the
dx
logarithmic function.

ln y = x ln a
d ln y dy dx
= . ln a
dy dx dx
1 dy
= ln a
y dx
dy
= y ln a
dx
dy
= a x ln a
dx
da x
Thus, = a x ln a
dx

51
 48

da u ( x )
If Y=aU(x), Using chain rule = u ' ( x )a u ( x ) ln a . As a result, we have
dx
da u ( x )
= u ' ( x ).a u ( x ) ln a
dx
The exponential function ex is a unique function with special behaviour.
That is.
de x
= ex
dx

However, in case we have ef(x), we can use the chain rule to evalute its
derivative. That is let f (x)=u and we will have eu.
If Y=eu and U= f(x)
dy dy du
=
dx du dx
= e u * u ' ( x)

de f ( x )
Thus, = f ' ( x )e f ( x )
dx

dy
Example: Find in each of the functions given below
dx
1. y = 4 x
2
2. y = e 3 x
3. lny=x
4. y = e ex
x
5. y = 10 x
3
6. y = e 4 x
2
7. y = e ln x

Solution
1. y = 4 x

Solution
dy
Directly inserting in the formula, we get = 4 x ln 4
dx
2
2. y = e 3 x

52
 49

Solution

dy 2
= 6 xe 3 x
dx
3. ln y = x
Solution
y = ex
dy
∴ = ex
dx
x
4. y = e e
Solution
dy de x e x
= .e
dx dx
x
= e x .e e
x
+x
= ee
2
5. y = 10 x
Solution
let x 2 = u, then ~ y = 10 u
dy dy du
= .
dx du dx
= (10 u ln 10.2 x)
2
= 2 x(ln 10)10 x

3
6. Y = e 4 x let u = 4 x 3 ∴ y = e u

dy dy du
= .
dx du dx
3
= 12 x 2 .e 4 x

2 dy d ln x 2 ln x 2
7. y = e ln x = .e
dx dx
2 2
= e ln x .
x
ln x 2
2e
=
x

53
 50

3.4. Differentials and Higher Order Derivatives

3.4.1 Differentials
dy
Until now we have used the symbol to represent the derivative of
dx
f(x) with respect to x. Now let’s assign different meanings to dy and
dx. Let f(x) =y and dx be a real variable thus, differential of y (dy) is
given by:
dy = f ' ( x)dx

Note:
1. dy and dx are variables the former being dependent and the
latter independent variable.
dy
2. If dx ≠ 0, one can have = f ' ( x)
dx
3. The main use of differentials is to find out approximations of
changes. In suing them for approximations, the value of dx
should be very small.

Examples

Find the differential of y (dy) for questions number 1,2, and 3.

1. y = x 3 − 4 x 2 + 5
x−2
2. y = 2
x
3. y = x , find dy when x=1 and dx=0.01
2

4. Using differentials, approximate the following number

a. 16.5 b. 3
65 c. 65
Solution

1. dy = (3 x 2 − 8 x)dx
dy d ( x − 2) dx 2 x 2 − 2 x( x − 2)
2. = x2 − ( x − 2) =
dx dx dx x4

54
 51

 x 2 − 2x 2 + 4x 
dy =  dx
 x4 
−x+4
= dx
x3

3. dy = 2 xdx
dy =2(1)(0.01)
dy =0.02
4. a. Let y = x
dy 1
=
dx 2 x
Taking x=16 and dx=0.5
1
dy = (0.5)
2 16
= 0.0625

y1 = y 0 + σy = x + σx = 16 + 0.0625 = 4.0625
∴ 16.5 ≅ 4.0625

b. Let y = 3 x
dy 1 13 −1 1
= x = 2
dx 3 3x 3
1
∴ dy = dx
3 x2
3

Taking x=64 and dx=1

1 1
∴ dy = .(1) = 16 = 0.021
33 64 2 3x
y1 = y 0 + dy = f (64) + dy = 4.021
∴ 3 65 ≅ 4.021
c. Let y = x
1
dy = dx
2 x
Taking x = 64 and , dx = 1
1
dy = = 0.0625
16
y + σy = f (64) + σy = 8.0625
65 ≅ 8.0625

55
 52

3.4.2 Second and higher order derivatives

In some cases, the derivative of a function turns to be a function. In

this case, we can take the derivative of f ' ( x) to determine the
df ' ( x) d2y
instantaneous rate of change of f ' ( x). = f ' ' ( x) = 2 is known as
dx dx
the second order derivative of f(x). One can find the second derivative
of f(x) by differentiating it twice. Similarly, the third derivative of
 d3y
f ( x)  f " ( x) or 3  is found by differentiating f(x) three times.
 dx 

Example:
Find the first five derivatives of the following functions.

1. y = 2 x 4 − 3 x 2 2. y = 3x 3 − 4 x 2 + 5

3. y = 2 x − 1 4. y = 4 x 3 + 5 x 2 + 3

5. y = 3x 4 + 6 x 3 − 3x 2 + 4 1
6. y =
x2

Solution:
1. f ' ( x) = 3 x 3 − 6 x
f ' ' ( x) = 24 x 2 − 6
f ' ' ' ( x) = 48 x
f ( 4 ) ( x) = 48
f ( 5) ( x) = 0
dy
2. = 9 x 2 − 8x
dx
d2y
= 18 x − 8
dx
d3y
= 18
dx 3
d4y
=0
dx 4
d5y
=0
dx 5
Why don’t you try for the rest? Do them, they are simple!

56
 53

Exercises
1. Given c( x) = x 3 − 9 x 2 + 33 x + 30 , determine the slope of marginal
cost at x=7.
2. If the production function is given by Y=20L3/4K5/4, what is
a. The range over which there is increasing returns to capital
b. The range over which there is decreasing returns to labor
c. The nature of returns to scale of production? Is it constant,
increasing, or decreasing returns to scale?
Solution:
1. c’(x)=3x2-18x, measures the slope of total cost curve
and to find the slope of marginal cost curve take the
derivative of MC, which is the second order derivative
of total cost function.
C”(x) =6X-18
C” (7) =6[7]-18=24
2. To answer question number two, you need to know
the concept of partial derivatives, which we will
present it below.

3.4 Partial derivatives and total derivatives

Though functions of singe variable have large simplicity, they are not
commonly used in economics. They are not common since the
functions that the real economic world consisted of are multivariate.
For example, our rational consumer will not consume one commodity
only; rather, s/he consumes different combinations to maximize
her/his utility. The representative production function of a firm is not
only a function of labor but it is also a function of capital. The overall
income of nations is not a function of physical capital stocks only. It is
also a function of human capital, factor productivity, institutions, and
government policies. Hence, we have to extend the concepts of
univariate calculus to multivariate ones. For the time being, let’s
begin with a function of two independent variables so that we can
simply extend it to n-variables case.
y = f ( x, z )
Let’s take the Cobb Douglas production function of a hypothetical firm.

y = ALα K β
Where:
Y-is the level of output
A-is the state of technology, which reflects productivity of factors
L & K represent the units of labor and capital
α & β are elasticity of y with respect to labor and capital respectively

57
 54

Example
3 1
1. Suppose for a firm y = f ( L, K ) = 60 L 4 K 4 , then
a. How many units output will be produced if the firm uses 81 labor
and 16 capital
b. Show that the production function is constant returns to scale
Solution

a. Y=f (L, K)=60 (81)3/4(16)1/4=3240

b. To check for returns to scale, add the exponents of labor and

capital. If the sum is greater than one it is increasing returns to
scale, less than one it is decreasing returns to scale and if it is
equal to one it is constant returns to scale. Since 3/4 +1/4=1, it
is constant returns to scale. For the proof, you can see the
following table.

Optional♥

Proof: For a general production function, when we change all the

inputs by a given proportion if output changes by equal proportion,
then the production function illustrates constant returns to scale. If
it changes by greater/smaller proportion, the production function
illustrates increasing/decreasing returns to scale respectively.

For Y = ALα K β and, Let Yo= ALα K β

Assume labor and capital have changed by λ, the new labor and
capital will be λL, and λK respectively. So the new production
function will be,

YN = A(λL) α (λK ) β

=AλαLαλβKβ

=A(λα+β) Lα K β

=(λα+β)A Lα K β

=(λα+β)Y0

If α+β >1, it shows increasing returns to scale, if α+β <1, it shows

decreasing returns to scale, and if α+β =1, it is constant returns to scale.

♥
Optional points are points that are essential for knowledge but do not appear on
your exam.

58
 55

3.4.1 Partial derivatives

Let y = f (x, z) . If we want to know the changes in y due to changes in x

or z, we have to find out the tow derivatives of y which are known as
partial derivatives with respect to each variable.

 ∂y 
The partial derivative of y with respect to x written as   is the
 ∂x 
derivative of y when z is considered as a constant and x is the only
independent variable.
 ∂y 
The partial derivative of y with respect to z is written as   is
 ∂z 
the derivative of y when x is considered as a constant and z is the
only independent variable.
∂f ∂f ∂f
= fx, = fz, = f y , etc
∂x ∂z ∂y

Example

1. If f ( x, y ) = 5 x 3 y 2 , find
∂f
a.
∂x
∂f
b.
∂y
∂ ∂f ∂2 f
c. f xx = ( ) = 2
∂x ∂x ∂x
∂ ∂f ∂2 f
d . f xy = ( ) =
∂x ∂y ∂xy
∂ ∂f ∂2 f
e. f yx = ( )=
∂y ∂x ∂yx
Solution
∂f
a. = 5 y 2 (3x 2 ) = 15 x 2 y 2
∂x
∂f 3 3 ∂2 f
b. = 10 x y and = 10 x
∂y ∂y 2
∂2 f ∂
c. = (15 X 2 y 2 ) = 30 xy 2
∂x 2
∂x

d. f xy = 30 x 2 y

59
 56

e. f yx = 30 x 2 y
Why don’t you try the following? Just try them!
2. If f ( x, y ) = (4 x + 3 y − 5) 8 , find f x , f y , f xx , f yy and f xy .
y
3. If f ( x, y ) = , find f x , f y , f xx , f yy , f xy
x + 3y
1 3
4.Given y = 60 L 4 K , find MPL /( L, K ) and MPK /( L, K ) where (L, K)=(81,16)
4

Moreover interpret your result.

3.4.2 Total derivatives (differentials)

We have seen that partial derivatives of f (x, y) indicate how much the
function changes with respect to small change in its variables. In
particular if σx and σy are small at the point (a, b), a change in x of
 ∂f 
σx units produces a change in f ( x, y ) of approximately  (a, b)σx units;
 ∂x 
and, a change in y of σy units produced a change in f ( x, y ) is
 ∂f 
approximated  (a, b)σy and the over all change is approximated
 ∂x 
using the sum of these terms. Thus,
 ∂f   ∂f 
f (a + σx, b + σy ) ≈ f (a, b) ≈  (a, b)σx +  (a, b)δy
 ∂x   ∂y 
The expression on the right hand side is known as total differential.

Note that,
 ∂f   ∂f 
For f ( x, y ) ⇒ total differential =  (a, b) σx +  (a, b) σy
 ∂x   ∂y 
 ∂f   ∂f   ∂f  
For f ( x, y, z ), total differential is  (a, b, c) σx +  (a, b, c) σy +  (a, b, c) σz 
 x   ∂y   ∂z  

Examples
3 1
1. Given a production function y = 60 L 4 K 4 . The total output when
L=81 and K=16 units is 3240 units, use the concept of total
differentials to approximate the effect of one unit decease in labour
and one unit increase in capital on output.

60
 57

Solution
 ∂f   ∂f 
f (81 − 1,16 + 1) ≈ f (81,16) ≈  (81,16) (− 1) +  (81,16) (1)
 ∂L   ∂K 
1 3
 16  4  81  4
= 45  (− 1) + 15  (1)
 81   16 
405 5
= −30 + = 20
8 8
Thus a unit in L decreases y by 30 and a unit increase in K increases y
405 5
by and in total y increases by 20 units.
8 8
2. Suppose the profit for a firm selling two goods at prices p and q
respectively is by:
π ( p, q) = −100,000 + 5000 p + 10,000q − 50 p 2 − 100q 2 + 10 pq
when p = 11 & q = 50, π will be $200,000.
Use total differentials to approximate the effect of a $ 1 increase in p
and $0.20 increase in q. Compare your result with π (101,50.20)

Now it is time for you to answer the exercise number 2 on page 21.

3.5 Some Applications of Differential Calculus

3.5.1. L Hôpital’s Rule

In dealing with indeterminate limits, the best way to find limits is using
the “L Hôpital’s Rule”. To use this rule, let’s differentiate among the
different indeterminate limits.
f ( x)
We say Lim is in
x →a g ( x)

0
a. Indeterminate form if Lim f ( x) = Lim g ( x) = 0
0 x→a x→a

∞
b. Indeterminate form if Lim f ( x) = Lim g ( x) = ∞
∞ x→a x→a

The following theorem allows us to deal with 0 indeterminate form.

0

Λ
First form of L H o pital ' s Rule : Suppose that f (a) = g (a ) = 0 , that
f ( x) f ' (a)
f ' (a ) and g ' (a) exist, and g ' (a) ≠ 0, then Lim =
x →a g ( x) g ' (a)

61
 58

For example, see

x3 − 1 0
Lim =
x →1 x − 1 0
2
3X
Lim =3
x →1 1
Stronger form of L’: Suppose that f and g are differentiable on
an open interval I containing a, and that g ' ( x) ≠ 0 on I if x ≠ a .
f ( x) f ' (a)
Then Lim =
x →a g ( x) g ' (a)
Λ ∞
Note that the L H o pital ' s rule also applies to indeterminate forms.
∞

We have also other indeterminate forms and some these are

⇒ 0∞
⇒ 00
⇒ 1∞
⇒ ∞ 0 and
⇒ ∞ −∞
0 ∞
To deal with these forms change them into or forms by taking
0 ∞
logarithms and performing some algebra.

3.5.2. Homogeneous Functions and Euler’s Theorem

A function is said to be homogeneous of degree “r”, if multiplication of

each of its independent variables by a constant “j” will alter the value
of the function by the proportion “jr,” that is if:
f ( jx1 ,..............., jx n ) = j f ( x1 ,.........., x n )
r

In general j can take any value. However, in order for the above
equation to make sense, (jx1,……….,jxn) must not lie outside the
domain of the function f. For this reason, in economic applications the
constant j is usually taken to be positive, as most economic variables
do not admit negative values.

Example

x 2w
1. f ( x, y, w) = + , if we multiply each variable by j, we get
y 3x
jx 2 jw
f ( jx, jy, jw) = + = f ( x, y, w) = j 0 f ( x, b, w).
jy 3 jw

62
 59

Thus f is a homogenous function degree of zero (r=0)

x 2 2w w j 2 x 2 2 j 2 w2
2. f ( x, y, w) = + ⇔ f ( jx, jy, jw) = +
y x jy jx
 x 2 2w 2 
= j  + 
 y x 
= j f ( x, y, w)
Thus f(x,y,w) is a homogeneous function degree of one (r=1).

3. h( x, y, w) = 2 x 2 + 3 yw − w 2
h(ax, ay, aw) = 2a 2 x 2 + 3a 2 yw − a 2 w 2
= a 2 (2 x 2 + 3ayw − w 2 )
= a 2 h( x, y, w)

Thus h is a homogeneous function degree of 2.

3.5.2.1 Linear Homogeneity

A function is linearly homogeneous if it is homogenous degree of one.

The Cobb Douglas production function is homogeneous function degree

of α & β , if α + β = 1 then it is a linear homogeneous function.

3.5.2.2. Properties of linearly homogeneous production function

For Y = ALα K β and α+β =1
1. Both APL & APK can be expressed as a function of (capital labor
ratio). If Y = ALα K 1−α , then
1−α
Y α −1 1−α K
APL = = AL K = A 
L L
−α
Y K
APK = = ALα K −α = A 
K L
2. Both MPL & MPK can be expressed as a function of capital labor
ratio.

3. If Y= f (K,L), then from the Euler’s theorem we can find

∂Y ∂Y
K +L =Y .
∂K ∂L
Let us formally and briefly state the Euler’s theorem.

63
 60

3.5.2.3 Euler theorem

If Z = f = ( y, x ) be homogeneous function of x and y of degree n and
posses continuous partial derivatives, then
This is Euler theorem where n
∂z ∂z
x +y = nz represents the degree of
∂k ∂y homogeneity and z the original
function.
But this shouldn’t confuse you with the total differential which is given
∂z ∂z
by dx + dy = dz and different from the Euler’s theorem.
∂x ∂y

Example:
Let’s take the famous production function Y = ALα K β with α+β =1 so
that we can have Y = AL1− β K β .

∂Y
= (1 − β )( AL1− β −1 K β )
∂L
∂Y
and , L = (1 − β )( AL1− β K β )
∂L
∂Y
= β ( AL1− β K β −1 )
∂K
∂Y
K
∂K
( )
= β AL1− β K β , ~ FromEuler ' s``theorem, we ~ can ~ write ~ as

∂Y ∂Y
K
∂K
+L
∂L
( )
= (1 − β )( AL1− β K β ) + β AL1− β K β

( )
= (1)( AL1− β K β ) − ( β )( AL1− β K β ) + ( β ) AL1− β K β
= ( AL1− β K β )
=Y

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IV. APPLICATIONS OF DIFFERENTIAL CALCULUS

4.1. Introduction
In the previous sections we have dealt with the techniques of
differential calculus. Now it is essential to see its applications. The two
of the most important applications of derivatives are obtaining the
graphs of functions and finding the optimum values. Optimization is
the “quest for the best!” It involves either maximization or
minimization. Since the economic person is an optimizer, most part of
the chapter deals with the applications of derivates to static
optimization problems♥. However, this doesn’t mean the application of
derivatives to find out a graph of a function is irrelevant for
economists. I hope no one forgets the relevance of graphs in
economics for Paul. A. Samuelson has said it “a graph is worth more
than thousand words.” In fact, we will briefly see the applications of
derivatives to graphing functions first and divert our attention to
optimizations.

Curve sketching- involves identifying the x-intercept and y-intercepts,

whether a function is increasing or decreasing in a given range, finding
out its extreme points, and finally checking whether the function is
concave up or concave down at a point or a point is an inflection point.
Let’s see each of these concepts and tie them with the derivatives of
f(x). Note that we commonly read graphs from left to right.

4.1.1. Increasing, and Decreasing Functions

A function f(x) is increasing if the value of the dependent and the
independent variables are directly related. That is as the value of x
increases, the value of f(x) increases too and vice versa.
Mathematically speaking:

A function f(x) is increasing over an interval if whenever X1>X2,

then f(X1)> f(X2) for any X1 and X2 in that interval.

On the other hand, a function f(x) is decreasing if the value of the

independent and the dependent variables are inversely related. That
is, as the value of X increases, the value of f(x) decreases and vice
versa.
Thus f(x) is decreasing over an interval if for any X1 and X2, when
X1>X2 f(X1)< f(X2) over that interval.

♥
The more realistic and subtle form of optimization is dynamic optimization which is
left for advanced courses.

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Graphically,
Y=f(x) Y=f(x)

F (x1) F (x2)

F (x2)
F (x1)

X1 X2 X1 X2
X1<X2 and f(X1)> f(X2), X2>X1 and f(X2)> f(X1),
therefore f(x) is decreasing therefore f(x) is increasing

The graphs of some functions, like that of marginal utility, have

increasing or decreasing property throughout. But, most of functions
are increasing in a given range and decreasing in another range. For
example, the graph of total product increases first, reaches maximum
and then decreases. Most of the economic functions are not increasing
or decreasing throughout. Graphs of marginal cost, average total cost,
average variable costs, average product, and marginal product are not
increasing or decreasing throughout. The point at which the graph
changes from decreasing to increasing or vice versa is known as an
extreme point or critical point or stationary point. An extrema point is
a point of relative maximum or relative minimum.

If a function is increasing, it has positive slope which implies that f ’(x)

is positive. If a function is decreasing, it has negative slope and
negative first derivative. If the point is an extreme pint, there is zero
slope or undefined slope at that point and f ' ( x) is zero or undefined.

In summary for f(x) =y

dy
• If < 0, f ( x) is decreasing
dx
dy
• If > 0, f ( x) is increasing
dx
dy
• If = 0, f ( x) has extrema value at this value of x
dx

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4.1.2. Testing For Concavity

Knowing the range over which the function increasing, decreasing, and
achieving relative extrema point is important to draw graphs of
functions but they are not all about. A given function increases over a
range but it can increase at an increasing rate, a constant rate or at a
decreasing rate. Thus, we have to see the concavity of graphs to add
this dimension.

A given function is concave up (changes at increasing rate) if the

function lays above all its tangent lines.

As we move from left to right the slope of f(x) increases; i.e., f ’(x) is
an increasing function. Which means f " ( x) is positive. Thus, if a
function is concave up, then f " ( x) >0.

A given function is concave down (changes at a decreasing rate) if the

function lies below its tangent line.

As we move from left to right the slope of f(x) decreases to zero. This
shows that f ’(x) is a decreasing function implying that f " ( x) <0.
Hence, if a function is concave down, then its f " ( x) is negative.

In summary,
If
• f " ( x) < 0, the function is concave down
• f " ( x) > 0, the function is concave up
• f " ( x) = 0, it may or not be point of inflection. At point of
inflection the function transforms itself from changing at an
increasing rate to decreasing rate and vice versa.

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Note that if a function changes at constant rate, f ' ( x) is a constant

function and f " ( x) =0. These curves are linear curves. Hence, getting
f “(x)=0 may not be a sufficient condition for a point to be an inflection
point.

Example
1. Given f ( x) = x 3 − 3 x − 2 find
a. The ranges of x over which f(x) is decreasing and increasing
b. The point at which f(x) attains its relative extreme value
c. The ranges of x over which f(x) is concave up and down
d. The point of inflection
e. Plot the graph

2. Given TVC ( x) = 18 x − 15 x 2 + 4 x 3 , find

a. MC function
b. The point of diminishing returns
c. The point at which stage II of production begins
d. Plot the graph

Solution

1. f ' ( x) = 3x 2 − 3 f " ( x) = 6 x
a. If f(X) is increasing if f ‘(x)>0. If f(X) is decreasing if
That is, 3 x 2 − 3 >0 f ‘(x)<0. That is,
x2 −1 > 0 3x 2 − 3 <0
( x − 1)( x + 1) > 0 x2 −1 < 0
( x − 1)( x − (−1)) > 0 ( x − 1)( x − (−1)) < 0
x > 1 or x < −1 −1 < x < 1

Thus, the function f(x) is increasing for the value of x>1 or x<-1. It is
decreasing in the range − 1 < x < 1

b. At the point of extrema, f ' ( x) = 0 . That is

3x 2 − 3 = 0
x2 = 1
x = ±1
f (1) = −4 f (−1) = −1 + 3 − 2 = 0
Hence, points of extrema are (1,4) and (-1,0).
c. f " ( x) = 6 x

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 65

If f(x) concave up, If f(x) concave down,

f " ( x) > 0 f " ( x) < 0
6x > 0 6x < 0
x>0 x<0

d. f " ( x) = 0 at the point of inflection. That is 6x=0 this occurs when

x=0

f ( x) = x 3 − 3 x − 2

-1 2

-2

-4
2. TVC = 18 x − 15 x + 4 x , find
2 3

a. Marginal cost function

b. Point of diminishing returns
c. The point at which stage II of production begins.
dTVC
a. MC = = 18 − 30 x + 12 x 2
dx
b. At the point of diminishing returns MP is maximum and MC is
minimum. Thus at this point
dMC
=0
dx
− 30 + 24 x = 0
30 10 5 × 25
x= = = = 1.25
24 8 4 × 25

c. At the point where stage II begins AP is maximum and AVC is

minimum. Thus,
AVC = 18 − 15 x + 4 x 2
dAVC
=0
dx
− 15 + 8 x = 0
15
x= = 1.875
8

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4.2. Free (unconstrained) optimization

Optimization, as described earlier involves maximization or
minimization of a given objective function. Most of our problems in
economics are optimized subject to some constraints but to grasp the
basic idea, let’s begin how one can handle optimization problems
functions without any constraint. In the next section we will extend
the technique to the constrained one. We will begin by briefly
describing an optimum value and proceed to the next section.

4.2.1. The concept of optimum (extreme) value

An extreme value of a function is the maxima or minima value of that

function. We can have two types of extreme values.

Relative minima
a. Relative extreme values
(Local extrema)
Relative maxima
Absolute minima
b. Absoloute extrema values
(Global extrema)
Absolute maxima

4.2.1.1. Relative Extreme Value

Relative extreme value: is an extreme value when compared with the
values near to it. It can be relative maxima (when it is higher than
any other point near to it) or relative minima (when it is lower than
any value near to it)

1 3
For example, consider the function y = x − x 2 − 3 x + 2 . It graph is:
3

Relative maxima
( -1, 1 )
3

-2 3 5

(3,-7)
Relative minima

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 67

In general

• If a function f has a relative maxima at x = x 0 if there exist an

interval around x0 on which f ( x0 ) ≥ f ( x) for all x in the interval
• If a function f has relative minima at x = x 0 if there exist an
interval around x0 on which f ( x0 ) ≤ f ( x) for all x in the interval

It is easy to find out relative extreme values using the derivative.

Previously we have seen that a function changes from increasing to
decreasing and vice versa. When its first derivative is zero or
undefined. Since a function changes from decreasing to an increasing
at a relative minima, we have f ' ( x) = 0 or f ' ( x) is undefined at relative
minima or maxima.

Hence, we can find relative maxima and minima for a function by

finding the values of x for which f ' ( x) = 0 or f ' ( x) is undefined. Once we
get the critical value, we can use the behavior of f ‘(x) near the
extreme point to know whether it is a relative minima or relative
maxima point.

To find out relative minima or maxima,

1st Find f ' ( x)

2nd Solve for the value of x which will make f ' ( x) = 0
3rd Use the above value to get the extreme value of the function (i.e,
insert the value you got in the 2nd step in f(x) to get the extreme
value).
th
4 Evaluate the first derivative function at some values of x to the teft
and the right of each critical point
a. If f ' ( x) > 0 to the left and f ' ( x) < 0 to the right of the critical value
of f(x), the critical point is relative maximum
b. If f ' ( x) < 0 to the left and f ' ( x) > 0 to the right of the critical value
of f(x), the critical point is relative minima.

Example

1. Find the relative extremas of the following functions

1
a. f ( x) = x 3 − x 2 − 3 x + 2
3
b. f ( x) = 2 x 3 − 6 x 2 + 6 x + 1
c. f ( x) = x 3 − 3 x + 6

71
 68

Solution

a. f ' ( x) = x 2 − 2 x − 3
f ' ( x) = x 2 − 2 x − 3 = 0
x 2 − 2x + 1 = 3 + 1
x − 1 = ±2
x = 3 or x = −1
1
f (3) = 33 − 3 2 − 3(3) + 2
3
=-7
1
f (−1) = − − 1 + 3 + 2
3
1 11
= 4− =
3 3

 11 
Thus, the critical values are (3,−7) and  − 1,  . To find out which
 3
one relative minima or maxima, use the number line.

f ' ( x) + 0 − f ' ( x) − 0 +
x −2 −1 2 X 0 3 4

 11  Thus, (3,−7 ) is relative minima.

Thus,  − 1,  is relative maxima.
 3

b. f ( x) = 2 x 3 − 6 x 2 + 6 x + 1
f ' ( x) = 6 x 2 − 12 x + 6
f ' ( x) = 6 x 2 − 12 x + 6 = 0
x 2 − 2x + 1 = 0
( x − 1) 2 = 0
x =1
f (1) = 2 − 6 + 6 + 1 = 3

The only critical value is (1,3) . To check whether it is relative minima

df ( x)
or maxima, let’s see the behavior of near 1.
dx

72
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f ' ( x) + 0 +
x 1
This shows that the function has no relative extreme value.

c. f ( x) = x 3 − 3 x + 6
f ' ( x) = 3 x 2 − 3
= 3( x − 1)( x + 1) = 0
x = 1 or x = −1
f (1) = 4 or f (−1) = 8

Critical values are (1,4) and (-1,8)

f ' ( x) + 0 − f ' ( x) − 0 +
f −1 f 1

Relative maxima at (-1,8). Relative minima at (1,4).

Note that instead of taking the number line to check for maxima or
minima, we can use the 2nd derivative. If λ is the critical value which
makes f ' ( x) = 0 , then the point (λ , f (λ )) is relative maxima if f " (λ ) < 0
and relative minima if f " (λ ) > 0 . But when f " (λ ) = 0 we can’t use the 2nd
derivative test and we have to use the behavior of the first derivative
to check for relative optima.

Example
Use the 2nd derivative test of the previous function to know whether
they are relative maxima or relative minima.

1 3
a. f ( x) = x − x 3 − 3x + 2
3
b. f ( x) = 2 x 3 − 6 x 2 + 6 x + 1
c. f ( x) = x 3 − 3 x + 6

 11 
a. f ' ( x) = x 2 − 2 x − 3 critical values are  − 1,  and (3,-7)
 3
 11 
f ' ' ( x) = 2 x − 2 f ' ' (−1) = −4 < 0 so  − 1,  is relative maxima
 3
f ' ' (3) = 6 − 2 = 4 > 0,∴ (3,−7) is relative minima

b. f ' ( x) = 6 x 2 − 12 x + 6

73
 70

f " ( x) = 12 x − 12
critical values x=1 (1,3)
f " (1) = 12 − 12 = 0
Use the number line in this case.

c. f ' ( x) = 3 x 2 − 3 f " ( x) = 6 x
critical values (1,4) and (-1,8)
 f " (1) = 0 
 f " (−1) = 0 Use the first derivative test in this case.
 

4.2.1.2. Absolute Extrema

Absolute extreme value: is an extreme value that the function attains

throughout its domain. The possible largest value that the function
attains in its domain is called absolute maxima of the function.
Similarly, the smallest possible value that the function attains
throughout its domain is known as the absolute minima of the
function. Note that a function may (or may not) have absolute
extreme value like there may or may not exist relative extreme value.

For example consider a function y=2x+1. As we increase the value of

x, the value of y increases continuously. Again, when we decrease the
value of x, the value of y decreases continuously. However, if the
domain is restricted to a closed interval [a, b] which means
a ≤ x ≤ b and the function is continuous everywhere within the interval,
the function will have an absolute minima and absolute maxima within
the interval. They may be located either:

a. At the end points; i.e., a and b or

b. At the interior points

To find absolute extrema within an interval

a. Find the critical values and critical points and check whether
they are within the interval
b. Calculate f(a) and f(b)
c. The largest value and smallest value obtained from the above
steps represent the absolute maxima and the absolute
minima of the function over the interval respectively.
Example
1. Find the absolute maxima and minima of f ( x) = x 2 − 6 x + 2 over the
interval 0 ≤ x ≤ 5.

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Solution
f ' ( x) = 0
2x − 6 = 0
x=3 There is absolute maxima at x=0 and absolute
f (3) = −7 minima at x=3 within [0, 5].
f (0) = 2
f (5) = −3
2. Find the absolute extrema of f ( x) = x 3 + 3x 2 + 4 . Over the interval
[-4, 2]
Solution
f ' ( x) = 3x 2 + 6 x = 0
Absolute maxima at x=2 (2, 24) and absolute
3x( x + 2) = 0 minima at x=-4 (-4, -12)
x = 0 or x = −2
f (0) = 4 f (−2) = 8
f (2) = 24 f (−4) = −12
Try the following problems and check your answers with that of the
tutor!
3. Given TC = 5 x + 200 and TR = 10 x − 0.01x 2 , what is the value of x, which
will maximize profit

4. Given TC = 200 + 25 x + 2 x 2 , what is the level of x which minimizes

average cost?

5. A farmer uses his 1000 hectar land to raise two grain crops. Grain
A is sold at a market and grain B is fed to his herd of 1000 cattle.
Using the data below determine how many hectars of each crop
should be planted in order to realize greatest profit.
a. A hectar planted with grain A yields 150 bushels which is sold at
$5 per bushel.
b. Feeding the herd, the yield of x hectares of grain B will result in
each steer weighing 350+x-0.001x2 pound. Steer sells for $1
per pound.
6. A book publisher sells 100,000 copies of a certain book each year.
Setting up each run costs $2000, each book costs $5 in material
and labor, and storage fees are $1 per book per year. Assuming, a
uniform rate of sales throughout the year, find the number of runs
that minimize the publishers cost.
7. A travel agency will plan a group four for groups of size 25 or
larger. If the group contains exactly 25 people, the cost is $300
per person. However, each person’s cost is reduced by $10 for
each additional person above 25. What size group will produce the
largest revenue for the agency?

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4.3. Constrained optimization

How strong the concepts of extrema are insightful, they worth nothing
for us unless they are tied to the theoretical and empirical problems
with which economists are concerned with. Consumers maximize
utility; but, under the constraints of income and prices. Producers
maximize profit; but, under the constraints of labor’s and capital’s
price. Since most of our optimization problems are some what
constrained it is necessary to extend the tools of calculus for
unconstrained to constrained optimization. This extension had first
emerged in the monumental work of Joseph Louis Lagrange. His
research has illustrated how one can obtain maxima or minima of a
function f(x, y) subject to a constraint g(x, y) =0. The method of
obtaining this optimum value is known as Lagrange Multiplier.

So as to find the critical values of f(x, y) subject to the constraint g(x,

y)=0, let’s introduce new variable " λ " to form the objective function.
That is:
f ( x, y , λ ) = f ( x, y ) ± λg ( x, y )

Lagrange has shown that the critical values of f ( x, y, λ ) will satisfy the
constraint g(x, y) and is the critical point of f(x, y).

To find out the critical values of f ( x, y, λ ) , find out the values of x, y,

and λ which will make ∂f with respect to each variable zero. That is

∂f 
= 0
∂x 
∂f 
= 0
∂y 
∂f 
= 0
∂z 

The values of x and y that simultaneously satisfy the three equations

are the critical values of λ and f.

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Examples

1. Find the critical points and values of f ( x, y ) = x 2 + y 2 subject to

g ( x, y ) = 2 x + 3 y − 4

Solution
f ( x, y, λ ) = x 2 + y 2 + λ (2 x + 3 y − 4)
= x 2 + y 2 + 2λx + 3λy − 4λ

∂f
= 2 x + 2λ = 0 λ = −x
∂x
∂f 2
= 2 y + 3λ = 0 λ=− y
∂y 3
∂f
= 2x + 3 y − 4 = 0
∂y

x = −λ
3
y=− λ
2
2
−x=− y
3
2
3x = 2λ x= y
3
2x + 3y = 4
2 
2 y  + 3 y = 4
3 
4
y + 3y = 4
3
13 12
y=4 Y=
3 13
2  12  8
x=  =
3  13  13
2 2
 8 12   8   12  16
The optimum value is f  ,  =   +   =
 13 13   13   13  13
2. Minimize cost c( x, y ) = 21x + 14 y subject to g ( x, y ) ⇒ xy = 600, where x,
y>0

Solution
c( x, y ) = 21x + 14 y
g ( x, y ) = xy − 600 = 0

77
 74

f ( x, y, λ ) = 21x + 14 y + λxy − 600λ

21 λ =λ
21 + λy = 0 ⇔ λ = −
y
 21 − 14
14  − = ⇔ 3x = 2 y
14 + λx = 0 ⇔ λ = −  y x
x
2
xy = 600 x= y
2 3
2 x = × 30 = 20
y. y = 600 3
3
min . cos t (20,30) = 21(20) + 14(30)
3
y 2 = x600 = 420 + 420
2
y = 30 = 840
3 1
3. Given production function y = 60 L 4 K 4 . Assume price of labor is
$100 whereas price of capital is $200 and the firm has $30,000
available to spend on production. How many units of labor and
capital should be used to maximize output?

Solution

3 1
Maximum: y = 60 L 4 K 4
Subjected to: PL L + PK K = 30,000
100 L + 200 K = 30,000

3 1
f ( L, K , λ ) = 60 L 4 K 4
+ 100λL + 200λK − 30,000λ

∂f −1 1
= 45 L 4 K 4 + 100λ = 0
∂L
∂f 3 −3
= 15L 4 K 4 + 200λ = 0
∂K
∂f
= 100 L + 200 K − 30,000 = 0
∂K

1
K 4
45  = −100λ
L
1
45  K  4
λ=−   ........(1)
100  L 

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 75

−3
K 4
15  = −200λ
L
−3
15  K  4
λ=−   ........(2)
200  L 
100 L + 200 K = 30,000.............(3)

45 14 −14 15 −3 4 3 4
− K L =− K L
100 200
6K = L
100(6 K ) + 200 K = 30,000
800 K = 30,000
300
K= = 37.5
8
Try the following problems and check your answers with that of the
tutor!
3 1
4. The production function of a firm is given by Q = 64 L 4 K 4 when labor
costs $96 per unit and capital costs $162 per unit the firm decides
to produce 3456 units of Q.
a. Determine the amount of labor and capital that should be utilized
so as to minimize cost.
b. Find the value of λ at the optimum value and give its economic
meaning
MPL P
c. Show that at the optimum level = L
MPK PK

5. On the basis of past experience a company has determined that its

sales revenue is related to its advertising according to the formula
s = 20 x + y 2 + 4 xy where x and y is the amount of money spent on
advertising on radio and TV respectively. If the company plans to
spend $30,000 on these two means of advertising, how much
should they spend on each method to maximize their sales
revenue?
6. Suppose the utility function for two goods x and y is given by
u = x 2 y, and a consumer purchases 6 units of x and 15 unit of y. If
the consumer purchases 60 units of y, how many units of x must be
purchased to retain the same level of utility.
7. If the utility function for two commodities is u = x 2 y, and the budget
constraint is 4 x + 5 y = 60 , find the values of x and y that maximize
utility.

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4.4. Testing For the Nature of Optima

In case when we are dealing with objective functions with more than
one independent variable, the first order partial derivative shows us
the value that is optimum. In case when the objective function is not
clearly stating whether to maximize or minimize [both in the
constrained and unconstrained case], we can’t identify whether the
critical value is maxima or minima. The next course-Linear Algebra for
Economists has a lot to say about this point, but let us briefly state the
simplest case instead of leaving you without any information. To know
whether the optimum value is maximum value or minimum value we
undertake 2nd order partial derivative test.

Let a and b be the critical points calculated from first order Lagrange
multipliers function. Then,
Find f xx (a, b) = A
f xy (a, b) = B and,
f yy (a, b) = C
Then calculate D = AC − B 2
If:
1. D>0 and A<0, then f (a, b) is local maximum
2. D>0 and A>0, then f (a, b) is local minimum
3. D<0, the function has a saddle point at f (a, b).
4. D=0, the test fails. The function must be investigated
near the point.

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IV.TECHNIQUES AND APPLICATIONS OF INTEGRAL

CALCULUS
4.1. Introduction

In this section, you will be briefly introduced the tools of

mathematical economics required to handle dynamic analyses of
economic theories and empirics. In the first section, we will touch
on topics of anti-derivatives and the indefinite integral, techniques
of integration and the general power rule, definite integral,
fundamental theorem of calculus, and area of irregular shaped
bodies, and some economic applications of integrals like
consumer’s, producer’s surpluses and social welfare, Present value
of future income stream, income distribution and Gini-coefficient. In
the second section, you will be introduced with an introduction to
differential equations and their applications in the dynamics of
market price in a free enterprise economy.

4.2. Antiderivatives and the Indefinite Integral

Up to this time, we have been concerned with finding the derivative

of a function. However, there are some problems in economics that
require us to come up with the original function given its rate of
change. These problems are common in the area of social welfare,
distribution of income of a country etc. The technique of finding out
the original function based on its derivative is known as integration
or antiderivative. For introduction let’s begin with illustrations.

IF f ' ( x ) = 2 then f ( x ) = 2 x or f ( x ) = 2 x − 10 or in general for a constant

“C”, f (x ) = 2 x + C

Thus,

∫ f ′(x )dx = f (x ) + C
Where
• The sign ∫ is read as “Integration of…”
• The term f ' ( x ) is the integrand
• The term dx as usual is w. r. t. “X”
• The term C is Constant of integration/an element of indefinite
integral.
Antiderivative involves finding f ( x) + C from f ' ( x). That is

∫ f ' ( x)dx = f ( x) + c

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The inverse relationship between differentiation and integration

helps us to set the formula for integration directly from
differentiation formula.

4.3. Techniques of Integration & the General Power Rule

In this section, I will briefly discuss the rules of integration which
shall refer to increasingly from time to time while we are dealing
with the techniques of integration.
a. The constant rule: Given constant K & C, ∫ Kdx = Kx + C

Example:
1. ∫ 2dx = 2 x + c

2. ∫ − 8dx = −8x + c
b) Constant Multiple Rule: for ∫ kf ( x )dx = k ∫ f ( x )dx

Example:
1. ∫ 2 x 7 dx = 2 ∫ x 7 dx
−10
∫ 10 x dx =10∫ x
−10
2. dx

C) Sum or Difference Rule: For ∫ ( f (x ) ± g (x ) )dx = ∫ f (x )dx ± ∫ g (x )dx

Example:
( )
1. ∫ 2 x 2 + 7 x − 10 dx = ∫ 2 x 2 dx + ∫ 7 xdx − ∫ 10dx

xn +1
D) Simple Power Rule: For ∫ x dx = + c for n ≠ -1
n

n +1
Examples:
1. Evaluate the indefinite integral of the following problems.
a) ∫ 3xdx
1
b) ∫x 3
dx

c) ∫ x dx

d) ∫ (x + 2)dx
e) ∫ (3x )
− 5 x 2 + x dx
4

x +1
f) ∫ x
dx

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Solution
3x 1+1 3x 2
a) +c = +c
1+1 2
x −3+1 −1
b) +C = 2 +C
− 3 +1 2x
1
+1
x2 2
c) + C = x 3/ 2 + C
1 3
+1
2
1 2
d) x + 2x + C
2

∫( )
3x 5 5 x 3 1x 2
3x − 5 x + x dx =
4 2
− + +C
e) 5 3 2

3x 5 5 x 3 x 2
= − + +C
5 3 2
x +1  x 1  1
f) ∫ x
dx = ∫  x
+ dx =
x
∫ x dx + ∫
x
dx

2 x 1 / 2+1 x −1 / 2+1
= + C, + C2
3 − 1/ 2 + 1
2 2/3
= x + C ,+2 x 1 / 2 + C 2
3
2 3/ 2
= x + 2 x1 / 2 + C
3

Since all the functions that we have come up with after integration
have unknown C term, all the integrations that involve C are known
as indefinite integral. Some times, when initial conditions are
given, the particular solution can be calculated.

Examples,
1
1. Given f (x ) = & f (1) = 2, find f ( x )
x2

Solution

85
 80

1
f (x ) = ∫ dx
x2
= ∫ x − 2 dx
x − 2+1
= +C
− 2 +1
1
=− +C
x
But f (1) = −1 + C = 2
C = 2 +1 = 3
−1
Thus f ( x ) = +3
x

2. Given the marginal cost MC= 32.0.004x and it costs $50 to

produce the first unit of output, find the total cost of
producing 200 units of output.

Solution
2
0.04 X
TC = ∫ MCdx = ∫ (32 − 0.04 x )dx = 32 x − 2
+C

=32X -0.02X2 +C
But, TC (1) = 50
TC (1) = 32 − 0.02(1) + C = 50

C= 50.02-32
C=18.02 which is Fixed Cost
Thus, TC = 32x-0.02x2+18.02
2
TC (200) = 32(200)- x 200 2 + 18.02
100
= 6400-800+18.02
= 5600+18.02
= 5618.02
e) The General Power Rule:

Before describing this rule, let us begin with an example.

If (
f (X ) = x2 + 6 )
12

f ' ( x ) = 12( x 2 + 6)11 (2 x) = 24 x( x 2 + 6)11

Thus, ∫ 24 x( x + 6)11 dx = ( x 2 + 6)12 + C

2

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Consider also
∫ 2 x( x + 1) 3 dx =
2

du
Let x2+1 = U and = 2x
dx
du u4 1
Thus, ∫ U 3 dx = + C = ( x 2 + 1) 4 + C
dx 4 4

In general, we can say du U n +1

∫U .dx = + C ,n ≠ − 1
n

dx n +1

By the same analogy we can reduce in to ∫U ⋅ dx = ∫ U n du using

n du
dx

Leibniz Rule

Example:
Evaluate the following problems

1..∫ 3(3 x − 1) 4
Solution
du
let (3 x − 1) = U , Thus =3
dx
 du 
= ∫ U  ⋅ dx
4

dx 
U 4+1
= U 4 du = +C
4 +1
1
= (3x − 1) 5 + C
5

2. ∫ (2 x + 1)( x2 + x)dx
Solution
du
let ( x 2 + x) = U and = 2x + 1
dx
 du 
= ∫ U ⋅ dx
 dx 
= ∫ udu
1
= U2 +C
2
1
(
2
= x2 + x + C
2
)

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3. ∫ 3x x 3 − 2 dx
2

Solution

du
let ( x 3 − 2) = U and = 3x 2
dx
 du 
= ∫ U
1/ 2
dx
dx 
∫U
1/ 2
du
U 1 / 2+1
= = +C
1
+1
2
2
= x3 − 2
3
( 3/ 2
+3 )

∫ x(− 4x )2
4. 2
+ 3 dx

Solution
dU 1 dU
Let 3-4x2 = U and = −8 X and (− )( )=X
dx 8 dx
 − 1 du 
= ∫ U 2 (  dx
 8 dx 
−1 du
8 ∫ U2
dx
⋅ dx
=
−1U 3 
 +C
8  3 
−1
= (3 − 4 x 2 ) 3 + C
24

7 x2
5. ∫ 4x3 − 5
dx

Solution
dU 1 du
Let 4x3-5=U and = 12X 2 as a result we have = x 2 and
dx 12 dx
7 du
= 7 x2
12 dx
Thus,
7 x2
∫ 4x3 − 5
dx is,

= ∫ 7 x 2U −1 / 2 dx

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 83

7 du
=∫ ⋅ U −1 / 2 dx
12 dx
7
∫U
−1 / 2
du =
= 12
1/2
7 U
( )( ) + C
12 1
2
7
= (4 x 3 − 5) + C
6

6. ∫ 1 − 3 x dx

Solution
du
Let U= 1-3x and = −3 as a result, we have
dx
−1
du = -3dx and dx = du
3
= ∫ U 1 / 2 dx
 −1
∫U
1/ 2
 du
=  3 
− 1 1/ 2
3 ∫
U du

1 U 1 / 2+1
= − +C
3 1
+1
2
−1 U 3/ 2
= +C
3 3
2

=
−2
9
( 1 − 3x ) + C 3

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F. Integration of Logarithmic & Exponential Functions

Like what we have done in relation to the derivative of non-
algebraic functions, here we will present the integration of the
logarithmic functions first accompanied by the integration of
exponential functions. Concerning the integration of logarithmic
functions, let’s begin with example. The general power rule of
integration applies only when n ≠ -1; i.e.
du U n +1
∫U ⋅ dx = + C iff n ≠ -1.
n

dx n +1
But, the following formula applies when n = -1. That is

du
∫U
−1
⋅ dx = ln |u| + C
dx

We use absolute value to protect it from being negative & the whole
logarithm undefined. This formula is a direct result of the fact that
d ln x 1
=
dx x
Thus,
1
∫ x dx = ∫ x
−1
dx = ln | x | +C

d ln u du 1
Similarly, when U is a function of X, = ⋅
dx dx u
1 du
∴∫ ⋅ dx = ln | u | +C
u dx

Example: Evaluate the indefinite integral of the following.

∫ (4 x + 1) 4dx
−1
a)

∫ ( x − 3)( x − 6 x + 1)
−1
b) 2
dx

Solution

a) Let 4x + 1 = U
du
=4
dx

du
Thus, ∫ U −1 ⋅ dx = ln | 4 x + 1 | +C
dx

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b) Let u(x) = x2 – 6x + 1
du ( x)
= 2 x − 6 =2(x-3)
dx
1 du
(X-3)=
2 dx
Thus,
 du 
∫ ( x − 3)( x − 6 x + 1) −1 dx = ∫ U −1 ( 1
2
2 dx 
) dx

1 du 1
= ∫ U −1 dx = (ln | u |) + C
2 dx 2
1
= ln | x 2 − 6 x + 1 | +C
2
= ln x 2 − 6x + 1 + C

x 4 − 2x3 + 4x 2 − 7x − 1
c) ∫ x 2 − 2x
dx

 x −1 
= ∫  ( x + 4) + dx …Using division of rational functions
2

x − 2x 
2

 x −1 
= ∫ (X + 4)dx + ∫  x
2
dx
2
− 2X 

1 3  1 
= x + 4 X + ∫  ( x 2 − 2 x) −1 ( )(2)( x − 1) dx
3  2 

=
1 3
3
1
(
x + 4 x + ln | x 2 − 2 x | + C
2
)
1 3
= x + 4 x + ln x 2 − 2 x + C
3

The second type of non-algebraic function we saw was exponential

functions. In relation to exponential function, we have seen that
de x
⇒ = e x , Thus, ∫e dx = e x + C
x

dx

Moreover, we have seen that when U is a function of X, that is,

de u de u
, give U = f ( x), = u ' ( x)e u , thus, ∫ e u u ' ( x)dx = e u + C
dx dx

91
 86

Example
Evaluate the indefinite integral of the following

∫ 2 xe
x2
a) dx

Solution
du
Let x2=U and = 2X
dx

∫ U ' ( x )e
u
dx
Thus, = e u + C
2
= ex + C

∫x
3
b) 2
e x dx
Solution
1
Let x3 = U, U’(x) = 3x2 and manipulating it little, we get x2 = U ' ( x)
3
1 u du 1 x3
3 ∫ dx
= e ⋅ dx = e + C = 1 e x3 + C
3 3

C) Suppose the marginal revenue from the sale of a product is

MR = 6 e0.01x. What is the revenue from the sale of 100 units of the
product?

Solution

TR = ∫ MRdx = ∫ 6e
0.01 x
dx

= ∫ 600u ' ( x)e dx ♠

u( x)

= 600e0.01 +C

♠
Let 0.01 x = U(x)
U’(x) = 0.01
1
U’(x) =
100
100u’(x) = 1
600 u’(x) = 6

92
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But Revenue= 0, when output x = 0, thus 0 = 600 + C

C = -600

TR = 600e0.01x – 600
TR (100) = 600 (e0.01 x 100 –1)
= 1030.97
G. Integration by Parts
Although the previous rules of integration are important elements in
the day to day mathematical toolkits of economists when dealing
with integration problems, there are problems which require us
more. Some of these problems are solved using the concept of
integration by parts.
We know that
d
(u ( x)m( x)) = u' m + m' u
dx
d 
∫  dx (um) dx = ∫ u ' mdx + ∫ m' udx
um = ∫ um' dx + ∫ mu ' dx

dm du
um = ∫ u dx + ∫ m dx
dx dx
um = ∫ udm + ∫ mdu

∴ ∫ udm = um − ∫ mdu.

This is the formula which helps us solving integration problems by

dividing them in to two parts. In fact, that is why it is called
integration by parts. Hence, in applying this method, you have to
divide the integrand in to two parts namely “U” and “dm”.
Experience has thought us that the success in using this method
strongly depends up on our choice of the two parts. From
experience we have learnt that there is more chance of arriving at
the solution easily if you choose the “U” part, a part which is easily
differentiable and “dm” part, a part which should be easily

93
 88

integrable. If you confront with a dilemma give priority to the easily

integrable part. Any way, let’s see examples for they make ideas
simple and clearer.

Examples
1. ∫ xe
x
dx

Solution
Dividing it into X part and exdx part let U= x and
dm = exdx so that m = ∫ dm = ∫ e dx = e x and du = dx
x

∫ udm = um − ∫ mdu Directly inserting in to the formula, we obtain

∫ xe dx =xe x − ∫ e x dx + C
x

∫ xe dx =xe x − ∫ e x dx + C
x

= xex - ex+C

2. ∫X
2
ln xdx

Solution
Dividing it into X part and exdx part let U=ln x and dm = X2dx, we
1 1
have m = ∫ dm = ∫ x 2 dx = x 3 and du= dx
3 x
Using the formula ∫ udm = um − ∫ mdu and directly inserting the values

into it we come up with,

1 3 1 1
= x ln x − ∫ x 3 ⋅ dx
3 3 x
1 1
= x 3 ln x − ∫ x 2 dx
3 3
1 2+1
X
1 3 3
= x ln x − +C
3 2 +1
1 1
= x 3 ln x − x 3 + C
3 9

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 89

4.4. Definite Integrals

Let f(x) be a function and “a” and “b” be real numbers. The definite
integral of f(x) over the interval from X=a to X=b denoted by
b

∫ f ( x)dx
a is the net change of an anti-derivative of f(x) over the
interval. Thus, if F(x) is an antiderivative of f(x), then we have
b

∫ f ( x)dx = F ( x)
b
a
= F (b) − F (a )
a

Note that it is used to find definite integral and not antiderivative of

a function.
b b

∫
a
f ( x)dx = F (b) − F ( x) = F (b) − F (a )
a

Now it is time to look at some examples so that the idea of definite

integral and fundamental theorem of calculus will be well planted in
your mind.

Example:
Evaluate the defnite integrals of the following
3

∫ x dx
3
1.
1

 x 3+1 3
= + C
3 + 1 1
1 3
=  x4 + C
4 1
1  1 
=  ⋅ 3 4 + C  −  ⋅ 14 + C 
4  4 
81 1
= −
4 4
= 20

4.4.1. Properties of Definite Integrals

Here are the basic properties of definite integrals which we often
refer to in dealing with analytical and empirical problems involving
definite integrals and related issues. The properties are intuitively
attracting and seem convincing though their proof is overlooked for
advanced courses or your investigation through further readings.
Let us present them!
For functions of f(x) & g(x), and constants of a, b, c, and k we have
the following properties.

95
 90

b b
1. ∫ Kf ( x)dx = K ∫ f ( x)dx,
a a
b b b
2. ∫ [ f ( x) ± g ( x)]dx = ∫ f ( x)dx ± ∫ g ( x)dx
a a a
b c b
3. ∫ f ( x)dx = ∫ f ( x)dx + ∫ f ( x)dx,
a a c
for a < c < b

a
4. ∫ f ( x)dx = 0
a
b a
5. ∫
a
f ( x)dx = − ∫ f ( x)dx
b

Example: Evaluate the definite integral of the following problems

5
1. ∫ 3x
2
dx
2
2
2. ∫e
3x
dx
−1
1 2
3. The marginal cost function for a company is MC= x − 2 x + 120
100
birr per unit, where X is output produced. Find the net increase in
cost when output increases from 100 units to 105 units.

Solution

∫ 3x dx =
2

2
1.
 3 x 2+1 5
= + C
 2 +1 2
=5 −2
3 3

= 125 – 8
= 117
2.
2

∫e dx =
3x

−1

1 2
=  e 3x + C 
3  −1
1 1
= e 6 − e −3
3 3
1 1 
=  e6 − 3 
3 3e 

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 91

1  e9 − 1
=  
3  e 3 
= 134.46

3.
105

∫ MCdxdx
100
105
 1 
= ∫  100 x − 2 x + 120 dx
2

100 
 1 3  105
= x − x 2 + 120 x 
 300  100
= 100.42

Exercise
Try the following problems.
1. Suppose that the marginal profit for a company is
MP=100+50X-3X2. Find the total profit earned from the sale of
three additional units if 5 units are currently being produced.
2. For a number of years the annual worldwide rate of oil
consumption was growing exponentially with a growth
constant of about 0.07. At the beginning 1970, the rate was
about 16.1 million barrels of oil/year. Let R(t) denote the rate
of oil consumption at time (t) where t is the number of years
since the beginning of 1970. Then a reasonable model of R(t)
is given by
R (t) =16.1e0.07t
How much oil was consumed between 1975 and 1980?

The answers are $888 and 0.465 for the first and second questions
respectively.

4.4.2. Area under a Curve

One of the most important applications of defnite integral is the

calculation of area under a curve.

Y Y=f(x)

a b X

97
 92

Let f(x) be a function that is continuous and non-negative for all X

between “a” and “b” where a<b, determine the area of the shaded
region lying beneath the curve Y=f(x) and above the X-axis from
X=a to X=b. The area of the shaded region is calculated using the
fundamental theorem of calculus stated above. It is given by
b b

∫ f ( x)dx = F (b) − F ( x)
a a
= F (b) − F (a )

Examples

1. Find the area bounded by f(x) = x2 – 1 with in the internal

1<x<2

Solution
Area
2
= ∫ f ( x)dx
1
2
= ∫ ( x 2 − 1)dx
1
2
1 
=  x 3 − x
3 1
8  1 
=  − 2 −  − 1
3  3 
= 4/3

2. Find the area bounded by f (t) = (4t+1)2 within the interval

0<t<1

Solution
Area
1
= ∫ (4t + 1) dt
2

3 1
1  4t + 1  
=   
4  3   0
1  5 3 13 
=  − 
4 3 3
31
=
3

3. Find the area of the region under the carve Y = X from X = x to

X=2

98
 93

Solution

Y=X
2
1

1 2

Area=
2

∫ xdx
1
2
1 
=  x2 + C 
2 1
1
= 2−
2
3
=
2

Why don’t you try this problem? Try it!

7. Compute the area under the curve Y = x2-3x+5 from
a) X = 3 to x = 4
b) X = 1 to x = 4

4.4.3. The area of a region between two curves

For any two functions f(x) and g(x), if Y = f (x) lies above Y = g (x)
from x=a to x=b, the area of the region between f(x) and g(x) from
x=a to x=b is given by

∫ [ f ( x) − g ( x)]dx
a

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 94

Example
1. Find the area of the region between Y= 2x2–4x + 6 and
Y = -X2 +2X+1 from X=1 to X=2

Solution
Over the range of values X=1 to X=2, the function Y= 2x2–4x + 6
lays above the function Y = -X2 +2X+1. To check which function is
greater, let’s sketch the graph with in the interval [1, 2].

Y = 2x2 – 4x + 6

6
R

-1
1 2
Y = x2 + 2x + 1
Hence, the area of the shaded region is

∫ [(2 x )]
2
R= 2
) (
− 4 x + 6 − − x 2 + 2 x + 1 dx
1

2
= ∫ (2 x − 4 x + 6 + x 2 − 2 x − 1 dx )
2

2
= ∫ (3x − 6 x + 5 dx)
2

2
= x3 − 3 x 2 + 5 x 1

[
= 2 − 3( 2) + 5( 2) − 1 − 3(1) + 5(1)
3 2
] [ 3 3
]
= [8 − 12 + 10] − [1 − 3 + 5] = 6 − 3 = 3
2. Find the area of the region between Y=X2 and Y=X2-4x+4
from X=0 to X=3
Solution
If we sketch both functions, we get

Y=X2 Y=X2-4x+4

0 1 3

100
 95

To find the point of inter section X2 = x2-4x+4

0 =-4x + 4
X=1
Since no line completely lies above the other over the shaded
region, we need to calculate the area from X=0 to X=1 and from
X=1 to X=3.
Thus, area is given by

∫ ( f ( x) − g ( x )dx = ∫ [( x − 4 x + 4) − ( x )]dx + ∫ ( x − x + 4 x + 4)dx

3 1 3
= 2 2 2 2

0 0 1
1 3
= ∫ (−4 x + 4)dx + ∫ (4 x − 4)dx
0 1
1 3
= − 2x 2 + 4x + 2x 2 − 4x
0 1

[ ]
= 2 + 18 − 2 − [2 − 4] = 2 + 6 + 2 = 10

3. Calculate the area between Y=x2 and Y= -ex from X= -1 to

X=2
Solution
Area=
2

∫ (x )
− (−e x ) dx
2

−1
2
= ∫ (x )
+ e x dx
2

−1
2
1 3
= x + ex
3 −1

8  −1 
=  + e 2  −  + e −x 
3  3 
2 -1
=3+e –e

4. Find the area bounded by Y = x2 + 2x + 3 and Y = 2x+4

Solution
In this case let’s check for points of intersection get the interval
Thus, x2 + 2x + 3 = 2x + 4
x2 = 1
x = ±1

f(x) 3 3 11
X -2 -1 0 1 2
g(x)
0 4 8

Within –1 < x < 1

101
 96

Y = 2x + 4 > Y = x2 + 2x + 3
g(x)>f(x)
1
Area = ∫ (2 x + 4 − x )
− 2 x − 3 dx
2

−1
1

∫ (− x + 1)dx
2

−1

−1 3 1
=∫ x +x
3 −1
 − 1  1 
=  + 1 −  − 1
3  3 
−1 1 2 4
= + 1 − + 1= 2 − =
3 3 3 5

4.5. Some economic applications of definite integrals:

4.5.1 Consumers’ Surplus and producers’ Surplus

In policy evaluation and welfare economics, economists make use of
the idea of consumers’ surplus, producers’ surplus, social utility,
and social welfare. In this section we will briefly touch on the
mathematical aspect of these concepts and finally we will see the
total income for a continuous income stream and its present value.

Consumer’s surplus: is the excess of money that the consumer is

willing and able to pay for a commodity over what he is actually
paid. Let’s take example. If price is Birr 3, the consumer is willing
to buy 5 units with Birr 25 but she is actually required to pay
3x5=Birr 15. The surplus of the consumer is then = 25 – 15 = Birr
10 when the relationship between price and quantity demanded is
assumed to be discrete.

Px = 8 – x
P X
O 8
1 7 Graphically
2 6
3 5 Px
8 Consumer’s Surplus
5 4
5 3
6 2
7 1 P=3
8 0 3
Px=8-x
5 8 x

102
 97

Using integral calculus assuming the relationship between price and

quantity demanded is continuous,
5 5 5
 1 
CS = ∫ [(8 − x ) − 3]dx = ∫ (5 − x)d = 5 x − x 2 
0 0  2 0

= [25 − 12.5]
= 12.5
Area of the shaded region using the law of triangle is given as
= (8-3) (5-0)X0.5
1
Shaded region = (8-3) (5-2) x = 12.5
2

In general, consumers’ surplus at price P and corresponding

quantity demanded x and demand function DX (written as a
function of price) is given by
X
CS = ∫ ( D X − P)dx
0

Examples:
1. Find the consumer’s surplus at price of $8 if the demand
1
function is given by P = 20 - x
2
Solution
To find point of intersection, find x at P =8. That is,
1
8 = 20 − x
20
1
x = 12
20
x = 240
Hence, the consumers’ surplus is given by
240
1
CS = ∫ (20 − x − 8)dx
0
20
240
 1 
= 12 x − x 2
 40  0
 1 
= 12(240) − (240 x 240)
 40 
= [12(240) − 6(240)]

= 6 (2(240) – 240) = 6x240

= $ 1440

103
 98

Producer’s surplus: is the excess of money that the producer

actually receives over what she is willing to accept/receive. If
supply function, written as a function of price, is given by S (x) and
we want to obtain producers’ surplus at price P and corresponding
quantity supplied x , we can use the general formula specified below:

x
PS = = ∫ P − S ( x)dx That is
0

S(x) = P

PS
p
Y =P

Example

1. Find the producer’s surplus at price level of $ 20 if the supply

1 2
function is given by P = 2 + x
500
Solution

To find the value x (quantity of intersection), let’s insert p in the

supply function.
1 2
20 = 2 + x
500
1 2
18 = x
500
x2=18x5000=90000
x = ±300

X =300… since producers will not supply at negative quantities.

Now, by just inculcating the values of x and p in the above formula,
we obtain
300
 1 
PS = ∫  20 − 2 − 500 x
2
dx
0 

104
 99

300
 1 
= ∫ 18 − 500 x
2
dx
0 
300
 1 
= 18 x − x3 
 15000  0

 300 x300 x300 

= 18 x300 −  − [0]
 15000 
=5400 – 1800
= $3600
2. If demand and supply functions are given below, find

a) Consumers’ surplus
b) Producers’ surplus
c) Social welfare assuming the economy is two-sector
Warlasian economy.

1
P x
= 20 −
20
x

1 2
P x
= 2+
500
x

Solution
To find the market price and quantity,
1 1
⇒ 20 − x = 2+ x2
20 5000
1 1
⇒ x2 + x − 18 = 0
5000 20
⇒ x 2 + 250 x − 90,000 = 0
⇒ X2 + 250X+ 15575 = 10575

− 250 ± 2502 + 360,000

⇒
2
− 250 ± 62,500 + 360,000
⇒
2
⇒ X = 200 or –450. We drop the negative value for quantity demanded can’t be negative.
1
P = 20 − x 200 = 10
20

Now, it is easy to deal with the problem. Insert the values in the
formulae so that you will come up with the answers.

105
 100

200
 1 
CS = ∫  20 − 20 x − 10 dx = 1000
0

200
 1
PS = ∫ 10 − 2 − 5000 x
dx = 1067
2

0 
Social welfare is the sum of total consumers’ surplus and producers’
surplus.
SW = CS + PS = 2067

4.5.2. Distribution of income

While no country has been able to achieve equal distribution of
income, a desirable goal in the eyes of many political scientists is to
reduce the in-qualities that exist. The table and corresponding
graph indicate how incomes in the United States were distributed in
1973 (source: Paul Samuelson, Economics (10th ED.), New York:
McGraw-Hill, q976). The left column of the table assumes that
people have been ranked according to income.

Note in the table that the lowest paid 40% of the population
receives only 18% of the income, whereas if income were
absolutely equally distributed, they would get 40% of the income.
In fact, if income were equally distributed, the data would lie along
the 45-degree line. In actuality, the data always lie along a curve
below the line, a curve called a Lorenz curve. The further this curve
moves from the 45 degree line, the more unequal the income
distribution.

100
Cumulative Cumulative 80
Percent of Income

percentage percentage
of people of income 60

2 0
20 6 40

40 18
20
60 35
80 59
100 100 20 40 60 80 100

Percent of people
As a measure of inequality, we use the so-called Gini coefficient of
inequality “g” defined by
g = Area between the Lorenz curve and the line y = x
Area under the line y = x

106
 101

The numerator is a definite integral whose value is between 0 and

½; the denominator has a value of exactly ½. Thus, g is between 0
(absolute equality) and 1 (absolute inequality). If y = f(x) is the
equation of the Lorenz curve, the formula for g takes the simple
form

1
g = 2 ∫ [x − f ( x)]dx
0

Example
Sketch the Lorenz curves y = x 2 and y = x 5 on the same graph and
determine the corresponding Gini coefficients.

Solution
The graphs are shown in Figure below. The required Gini coefficients
are
 x2 x3  1 1
[ ]
1
g = 2 ∫ x − x 2 dx = 2  −  ∫ =
0 2 3 0 3
and
 x2 x6  1 2
[ ]
1
g = 2 ∫ x − x dx = 2  −  ∫ =
5

0 2 3 0 3

Y
100

.80

.60 Y=x

.40 Y = x2

.20
Y = x5
x
.20 .40 .60 .80

4.5.3. Continuous Money Streams

You will formally be introduced with the notion of continuous
compounding of interest in monetary economics. If P dollars is
invested at annual rate r compounded continuously, then its value F
at the end of t years is given by F = Pe rt . Solving this equation for P
in terms of F gives the equation

P = fe − rt

107
 102

Written in this from, the equation tells us the present value P of F

dollars that will be received t years from now, assuming that
interest is compounded continuously at the annual rate r.

Example
Bethel knows that she will need to replace her car in 3 year How
much would she have to put in the bank today at 8% interest
compounded continually in order to have the $12,000 she expects
to need 3 years from now?

Solution
We apply the boxed formula, remembering that the interest rate of
8% must be written in its decimal form.

P = 12,000e −0.08( 3) = 12,000e −0.24 = $9439.53

4.5.4. Continuous Money Streams within a Period

There are many situations in business and industry where it is

useful to think of money as flowing continuously into an account.
For example, the ABC Company plans to buy an expensive machine
which it estimates will increase the company’s net income by
$10,000 per year. But this income won’t come at the end of each
year; it will come in dribbles throughout the year. As a model for
what will happen, it is convenient to think of the machine as if it will
produce income continuously. Our next example raises an
important question for the company to answer.

Suppose that the annual rate of income of an income stream is

R (t). Suppose further that this income stream will last over the
period 0 < t < T. If interest is at rate r compounded continuously,
then the present value PV of this income stream is given by

T
PV = ∫ R(t )e − rt dt
0

Example
Suppose the ABV Company takes a more optimistic view and
estimates that the new machine will produce income at the rate R
(t) = 10,000 + 200t. What is the present value of this income
stream, again assuming interest at 9% compounded continuously
and a lifetime of 8 years?

108
 103

Solution

8
PV = ∫ (10,000 + 200t )e −0.09t dt
0

8 8
= ∫ 10,000e −0.09t dt + ∫ 200te −0.09t dt
0 0

Let us modify the problem in the above example in another way by

assuming that the machine will last indefinitely. More generally, let
us ask for the present value PV of a perpetual (meaning infinitely
long) income stream which produces income at an annual rate R(t),
assuming that interest is at an annual rate r compounded
continuously. The result in this case is

∞
PV = ∫ R (t )e − rt dt
0

Here, we face a new kind of integral, one with an infinite limit.

Such integrals are called improper integrals and must be given a
clear definition. We do this by defining

∞ T
R ( t ) e − rt dt
∫ R(t ) dt = Limr →∞ 0
e − rt ∫

This point leads us to the concept known as improper integrals

which we will handle right now!

4.6. Improper Integrals

With the counter-revolution of new classical macroeconomics, there
has been a shift by economists to consider an infinitely lived agent.
This agent is widely used in perfect foresight-model, rational
expectation model, Ricardian equivalence theorem, endogenous
economic growth models, among others. Hence, saving and
investment decision of households is governed by the utility
function agents maximize throughout, that is,

∞
 C 1−δ − 1 
U (c) = ∫ e − Bt  Ldx
0  1 − δ 

109
 104

Where
• U(c) is the utility function the social planner maximizes,
• -B is the discount rate agents assign to future consumption,
• C is percapita consumption
• L is the size of population
• And δ is the inverse of the intertemporal elasticity of
substitution.
Now we have faced some what new, but definite integral, problem
in this function. Such type of integral is known as improper
integrals. An improper integral is an integral which is bounded by
either (− ∞, ∞ ) , (c, ∞ ) , or (− ∞, c ) where c is a constant. This limit of

integration is infinite. To find out the value of this integral use the
formula:

∞ b

∫
f ( x ) dx
a) For f ( x)dx = lim b→∞ a∫
a

This holds if f is continuous over the internal [a, ∞ ).

b) If f is continuous on the interval (- ∞, b], then

b b

∫
∫ f ( x ) dx
f ( x ) dx = lim a → −∞ a

−∞

c) If f is continuous on interval (− ∞, ∞ ) , then

∞ c ∞

∫ f ( x)dx = ∫ f ( x)dx + ∫ f ( x)dx

a −∞ c

c b
= Lim a →−∞ ∫ f ( x)dx + Limb→∞ ∫ f ( x)dx
a c

Note: In each three cases of above, if limit exists, then the

improper integral is said to converge; otherwise the improper
integral diverges.

Examples

110
 105

∞
1
1. Find the value of ∫ x dx and
1
determine its status of

convergence.

Solution

∞ b

∫1 x dx = Limb→∞ ∫1 x dx = Limb→∞ [ ln x ]1 = Limb→∞ [ln b − ln 1]

1 1 b

Since limit does not exist, the integral diverges.

∞
1
2. Find ∫x
1
2
dx

Solution

∞ b b
1 1  − 1 −1 
∫1 x 2 dx = Limb→∞ ∫1 x 2 dx = Limb→∞  x  1 = Limb→∞  b + 1 = 1
Since limit does exist, the integral converges.

3. Now it is time for you to check whether you have grasped the
concept or not. To this end, why don’t you handle this problem? Use
0
dx
your paper and pen right now! ∫ 3
− ∞ (1 − 2 x ) 2

4.8. Differential Equations

Most of the dynamic problems in economic theory or empirics can

be handled with the tools we have developed earlier. However,
there is large body of the science which requires beyond what we
have covered earlier. To this end, let’s see the concept of
differential equations in a brief, precise and a sweet to swallow
manner.

4.8.1. First Order Differential Equations

Differential equation is an equation that involves derivatives of
variables. If there is only one independent variable, then it is called
an ordinary differential equation. (ODE)

The order of the ODE is that of the highest derivative; that is, if the
highest derivative in an ODE is order of n, then it is an nth order
ODE. When the functional form of the equation is linear, then it is a
linear ODE.
Let have illustrations!

111
 106

•
a) a1 y (t ) + a 2 y (t ) + x(t ) = 0 This is 1st order linear ODE.
• dy
Where ⇒ y (t ) =
dt
⇒ a1 ,&a 2 are constants
⇒ x(t ) Known function of time

•• •
b) a1 y (t ) + a 2 y (t ) + a3 y (t ) + x(t ) = 0 This is 2nd order linear ODE
•• d2y
Where y (t ) =
dt 2

1
c) log y& (t ) + = 0 is non-linear first order ODE.
y (t )

4.8.1.1 First order linear differential equations with constant coefficient

and term

dy
Such an equation is + u (t ) y = w(t )
dt
When u (t) and w (t) are constants, it is first order linear differential
equations (LDE) with constant coefficient and constant term.
When w (t) = 0, it reduced to homogenous 1st order LDE
W (t) w(t ) ≠ 0, is it know as not-homogenous case

Let’s see how to solve each of them

The homogenous case

dy
This occurs when w (t) = 0. That is + ay = 0 which is reduced to
dt
the general solution of Yt = Ae − at

Let’s directly solve this equation

dy
= ay
dt
1
dy = − adt
y
1
∫ y dy = ∫ − adt = −∫ adt
ln Y == −(at ) + (c)

112
 107

Y = e − at + c
Y = e c ⋅ e − at

Y = Ae − at Where A = Y (0); i.e., when t = 0

From the solution, it can be seen that the objective and solution of
solving differential equation is not numeric value rather t is the time
path of y (t).

The Non-homogenous Case

dy
That is + ay = b . This occurs when w (t) is a constant “b” different
dt
from zero. The solution to such an equation is consists of sum of
two terms namely the complimentary function (Yc) and the
particular integral (YP). Each has its own economic interpretation as
will be clear latter.
Yc is the solution had “b” been Zero (the homogenous case)
YP is any particular Solutions

Thus, Yc = Ae − at
dy
By assuming Y to be constant = 0 and we’ll have ay = b and
dt
b
YP =
a
b
∴ The general solution will be Y (t ) = Yc + Yp = Ae − at +
a
But when t=0, our equation will be reduced to
b
Y (t ) = Ae − at +
a
b
Y (o ) = A +
a
 b
A = Y( 0 ) − 
 a
Hence, we finally come up with

113
 108

 b b
Yt = Y( 0 ) −  e − at +
 a a
When b = 0, Y (t) turns to the homogeneous case
Examples
dy
a) Solve + 4 y = 0. and Y (o) = 1
dt
Y (t ) = Ae − at

Y (o) = Ae 0
1=A
A=1

∴ Y (t ) = e −4t

dy
b) Solve + 2 y = 6 and Y (0) =10
dt
Solution
 b b
Yt = Y (o) −  e − at +
 a a

 6 6
Yt = 10 −  e −2t +
 2 2

Yt = 7e − 2t +3

114
 109

Application of the Non-Homogenous case: Dynamic model of the market

price
The objective in this section is to see whether a free enterprise
economy without any form of government intervention can bring a
price which will satisfy both consumers and producers and whether
this price will be stable [ deviances from the equilibrium position will
not bring a sustained change in price and the equilibrium state will
be maintained again with some adjustments] or knife
edge[unstable] through fulfilling the economic interest of both
producers and consumers. Let’s begin with simple model of market.

For a given product,

Qd = α − β P.................(α ⋅ & β > 0) … Demand function

Qs = γ − δP.................(γ & δ > 0) … Supply function

Equation α − βρ = −γ + δρ
α + γ = (δ + β ) ρ
α +γ
P= ⇒ it is some positive constant
u+β

If P (0) ≠ P [there is a deviation from the equilibrium state], what is

the nature of adjustment of market price?

The rate of change in price is a function of excess supply. That is, if

supply is larger than what is required by consumers, market price
decrease and if it is lower than what is needed by consumers price
will increase. Hence, without any complexity, we can model the rate
of change in price as follows.

dp
= m(Qs − Qd ) Where m>0
dt
dp
= − m(γ + δρ − α + βP)
dt
= m(−γ + α ) + m(δ + β ) P
dp
+ − m(δ + β ) P = − m(γ + α ) Using the formula stated above, we get
dt

115
 110

 − m(γ + α )  − m (δ + β ) t − m(γ + α )
⇒ P(t ) =  e + This is identical to the
 − m(δ + β  − m(δ + β )

 γ + α  − m (δ + β ) γ + α
expression P (t ) =  P(0) − e +
 γ + β  δ +β

[ ]
Pt = (0) − P e − m (δ + β ) t + P

P(0) − P
Pt = +P
e m (δ + β ) t

Thus, as time “t” approaches to infinity, t → ∞, P(t ) = P , the market

price “Pt”. This implies that the market (equilibrium) price and
concomitant quantity are stable.

116